Back in February, three Democratic US Senators wrote to then Acting SEC Chair Allison Herren Lee urging the SEC to reexamine its policies on Rule 10b5-1 plans – Liz blogged about it at the time. Since then, Commissioner Lee responded to the Senators with a letter saying that she instructed the staff to review Rule 10b5-1 and develop recommendations for possible changes. This excerpt from Commissioner Lee’s letter touches on aspects of the Rule for which Commissioner Lee requested review:
The Commission adopted Rule 10b5-1 in August 2000 and has not substantively revisited it since then. In the intervening years, market developments and other circumstances have revealed aspects of the rule that may need to be reconsidered, including whether better disclosures about these plans are warranted. Your letter identifies a number of approaches, such as cooling off periods, that may enhance the rule’s effectiveness. With respect to disclosure, there are no specific requirements related to information about 10b5-1 plans and, while some public companies do disclose the details of transactions made pursuant to their 10b5-1 plans, many do not. Similarly, while some insiders indicate on their beneficial ownership reporting forms when transactions are conducted pursuant to 10b5-1 plans, many do not.
As part of this review, the staff will consider the points you raise with respect to public disclosure of 10b5-1 plans, cooling off periods and short-swing profits.
In their February letter, the US Senators requested feedback about the number of enforcement actions the SEC had taken with regarding to 10b5-1 plans in the last five years. They also requested information about actions the SEC takes to ensure 10b5-1 plans are compliant with SEC rules. Commissioner Lee’s letter outlines, and includes a brief summary of, the Enforcement actions brought over the last five years that include mention of Rule 10b5-1 plans and says the Enforcement Division will continue to evaluate, as appropriate, Rule 10b5-1 plans during its investigations into potential Enforcement actions.
Reforms to Rule 10b5-1 could be on the horizon. Commissioner Caroline Crenshaw reportedly views a “cooling-off” period as a solution. And, as part of his confirmation process, SEC Chair Gary Gensler’s response to questions indicate he would consider modernizing Rule 10b5-1.
To help stay on top of the latest developments, mark your calendars for July 20th and tune in to our webcast “Insider Trading Policies & Rule 10b5-1 Plans”– to hear our own Dave Lynn of Morrison & Foerster, Meredith Cross of WilmerHale, Alan Dye of Hogan Lovells and Section 16.net and Haima Marlier of Morrison & Foerster discuss the new enforcement environment, Rule 10b5-1 plan considerations for share buybacks, intersection of insider trading policies and Rule 10b5-1 plans, blackout period trends and more!
Executive Order: Climate Disclosures Get a Push From the Top
Late Thursday afternoon, President Biden issued an Executive Order on Climate-Related Financial Risk, which has been rumored to be coming for a couple months. It establishes the Administration’s policy to:
– Advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk … including both physical and transition risks;
– Act to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color … and spurring the creation of well-paying jobs; and
– Achieve the target of a net-zero emissions economy by no later than 2050.
Major highlights of the EO include:
Developing a formal comprehensive, Government-wide strategy regarding the measurement, assessment, mitigation, and disclosure of climate-related financial risk to Federal Government programs, assets, and liabilities – in order to increase the long-term stability of Federal operations;
Requiring The Secretary of the Treasury to assess, in a detailed and comprehensive manner, the climate-related financial risk, including both physical and transition risks, to the financial stability of the Federal Government and the stability of the U.S. financial system. The report issued by Treasury is to include a discussion of:
the necessity of any actions to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets – and a recommended implementation plan for taking those actions, and
any current approaches to incorporating the consideration of climate-related financial risk into Financial Stability Oversight Council (FSOC) members’ respectiveregulatory and supervisory activities and any impediments they faced in adopting those approaches.
Treasury is also required to direct the Federal Insurance Office to assess climate-related issues or gaps in the supervision and regulation of insurers.
The Secretary of Labor must consider publishing, by September 2021, for notice and comment, a proposed rule to suspend, revise, or rescind the prior administration’s rules that would limit ERISA plans’ ability to consider ESG factors in investment & voting decisions (85 Fed. Reg. 72846 and 85 Fed. Reg. 81658) – this type of action would go further than the DOL’s previously-announced non-enforcement policy for these rules and is intended to bolster the resilience of 401(k) and pension investments.
OMB and the Director of the National Economic Council, in consultation with the Secretary of the Treasury, are directed to develop options to enhance accounting standards for Federal financial reporting where appropriate and should identify any opportunities to further encourage market adoption of such standards.
The Federal Acquisition Regulatory Council is to consider amending the Federal Acquisition Regulation (FAR) to:
require major Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets; and
ensure that major Federal agency procurements minimize the risk of climate change, including requiring the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.
2020 Hotline & Incident Reporting: Overall Report Volume Declined Although Not Uniformly
Navex Global recently released its “2021 Incident Management Benchmark Report.” The report provides data collected from over 3000 organizations that received 10 or more hotline or other incident reports in 2020. The report’s executive summary notes that findings can only be understood within the context of Covid-19 so key measures are reviewed on a month-to-month basis. Here are a few highlights:
Overall incident report volumes decreased although not across the board. For the first time in the history of our annual benchmark the median number of reports declined, dropping to 1.3 reports per 100 employees. A month-to-month analysis reveals the extent to which this decline was driven by COVID-related events. After an initial reporting increase in March (when state of emergency and stay-at-home orders were first declared), reporting levels quickly plummeted by over 30%, reaching record lows in May. To date, report volumes have yet to return to their pre-COVID levels. While the report volume median decreased, the overall range actually increased, reflecting greater volatility and variation within the customer base. Thus, it is inaccurate to state that all, or even most, firms had a uniform experience.
Among other things, the report also found online reporting continues to accelerate while telephonic reporting has declined, anonymous reporting continued on a slow downward trajectory, and the gap between incident occurrence and reporting increased, especially in accounting, auditing and financial reporting where it increased from 16 days to 36 days.
Programming Note: Pausing Blog Emails
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The SEC signaled again that it may not be all in on SPACs the way some might be hoping. Last week, the SEC issued an Order disapproving Nasdaq’s proposed rule change relating to SPACs. Nasdaq’s proposed rule change would’ve allowed SPACs that plan to complete one or more business combinations an additional 15 calendar days following the closing of a merger to demonstrate that the SPAC had satisfied the round lot shareholder requirement. As part of the rationale for proposing the rule change, Nasdaq noted difficulty SPACs can encounter when gathering evidence to demonstrate satisfaction of the shareholder requirement because SPAC shareholders may redeem their shares right up until the time of the merger.
As noted in the SEC Order, CII submitted a comment letter to the SEC expressing concern about whether Nasdaq’s proposed rule change was consistent with the protection of investors and the public interest. The SEC shared that concern, and in disapproving the proposal said that Nasdaq didn’t explain how the proposal addresses regulatory risks to fair and orderly markets, investor protection and the public interest and manipulation concerns.
While Nasdaq has amended its proposal to require certain public disclosure, the Commission does not believe the disclosure required by the proposed rule adequately addresses the potential risks associated with trading during a time period in which the minimum number of round lot shareholders may not be present, nor has Nasdaq explained why subjecting shareholders to this potential risk is consistent with the protection of investors and the public interest, and the other requirements of Section 6(b)(5) of the Exchange Act.
Direct Listings: SEC Approves Nasdaq Proposal
At the end of last year, I blogged about Nasdaq’s primary direct listing proposal, which was awaiting SEC review following the SEC’s approval of the NYSE direct listing rule. After a bit of a wait, last week the SEC approved Nasdaq’s proposed rule to permit primary direct listings. This Paul Weiss memo summarizes the rule, which is effective immediately.
The rule will allow companies to undertake an IPO and concurrent Nasdaq listing without the use of underwriters – previously direct listings were only available for secondary offerings by existing shareholders. Over time we’ll see to what extent primary direct listings take off. Direct listings aren’t without risks, but they do offer certain advantages, which may be best suited for companies with strong name recognition.
PPP Loan Forgiveness Review: Consider Preparing for Potential Forgiveness Appeal Now
Last year, when the SBA rolled out the paycheck protection program, questions arose about whether companies made their “need certifications” in good faith. A borrower’s need certification was important because it could impact whether the SBA denied a PPP loan or ultimately forgiveness of a loan. Recent data on the SBA website showed it had approved over 11 million PPP loans, forgiven over three million and thousands more were under review.
A Baker Donelson memo summarizes procedures relating to the PPP need certification and notes that the SBA never stated that it would only analyze the need certification during the loan review. Should the SBA deny forgiveness of a PPP loan, John blogged earlier this year about the short window to file an appeal. Baker Donelson’s memo says PPP borrowers should prepare a record for any potential appeal during the SBA’s review process, here’s an excerpt with more about reasons some companies should prepare now:
Significantly, the standard of review for PPP loan appeals “is whether the SBA loan review decision was based on clear error of fact or law” and the appellant has the burden of proof by a preponderance of the evidence.4 Therefore, when appealing any decision related to a PPP loan, the appellant will be in the best possible position if it can show that the SBA made a clear error of fact or law based on the information that was before SBA at the time when SBA made its decision. This means that the PPP loan borrower should include as much helpful information as possible in the record before SBA makes its final decision. For example, when OHA decides size appeals in the government contracts context, it frequently rules that information that was not before SBA when the formal size determination was made is not relevant to the appeal.5 While SBA size protest cases show that OHA does sometimes allow supplementation of the record when the new evidence “is relevant to the issues on appeal, does not unduly enlarge those issues, and clarifies the facts on those issues,”6 it is still best for the borrower to include as much helpful information as possible in the administrative record. Therefore, borrowers should make every effort to get information into the administrative record that it believes will assist its PPP loan review by the SBA or any appeal of the SBA’s decision.
The memo also outlines steps for companies to consider so they can get as much helpful information into the record to help in an appeal process.
From a review of over 2000 Form 10-Ks following the effective date of the new human capital management (HCM) disclosure requirement, PwC released an updated memo to include findings from that review. At a high-level, PwC found 89% of the filings included both qualitative and quantitative metrics and disclosures commonly included discussion of COVID-19 and its impact on human capital (most of which were qualitative) and diversity, equity and inclusion (again much of which was qualitative).
When the SEC amended Item 101 of Reg S-K, it took a principles-based approach and didn’t mandate disclosure addressing specific human capital metrics. So, it wasn’t too surprising that PwC found when quantitative DEI metrics were disclosed, the disclosures primarily included the total number of employees and gender percentages.
With increased focus on employees, and as stakeholders look for HCM metrics, it can be helpful when you find a company that’s posted a stand-alone human capital management report, which often include much more detailed HCM disclosures. Over a year ago, I blogged on our “Proxy Season Blog” about Bank of America’s first human capital management report and just last week, Verizon released its first human capital management report. To each company’s credit, they include fairly extensive HCM disclosure in their 10-K but the HCM reports go further and include charts and visuals beyond what you’d commonly find in a 10-K.
Verizon’s report includes a deep dive with data about the makeup of its global workforce, and among other things, covers topics like initiatives to attract and develop employees, pay equity, how it measures progress and actions it took in 2020 in response to COVID-19. Verizon’s deep dive into workforce data is one of the more detailed examples I’ve come across and it begins on page 35 – it includes gender and racial/ethnic diversity data globally and by business segment. Within each of those areas it shows the data across Verizon pay bands.
In terms of HCM disclosures included in SEC filings, a recent Stanford Closer Look article summarized its early look at HCM 10-K disclosures and it again points to why those looking for metrics might be better off looking elsewhere.
We find that while some companies are transparent in explaining the philosophy, design, and focus of their HCM, most disclosure is boilerplate. Companies infrequently provide quantitative metrics. One major focus of early HCM disclosure is to describe diversity efforts. Another is to highlight safety records. Few provide data to shed light on the strategic aspects of HCM: talent recruitment, development, retention, and incentive systems. As such, new HCM disclosure appears to contribute to the length but not the informativeness of 10-K disclosures.
Equilar has been tracking HCM disclosures in SEC filings and found the median character count has increased more than four times over the last year. Equilar’s most recent blog entry includes examples with varying levels of disclosure, some including data about age diversity by showing a breakdown of workforce across age brackets.
Internal Investigations: How-to Guide
Last year, John blogged about SEC press release announcing a $114 million whistleblower award. In that press release, the SEC said the individual repeatedly reported their concerns internally, and then, “despite personal and professional hardships,” the whistleblower alerted the SEC and provided ongoing assistance. When companies receive an internal alert of possible wrongdoing, if the company determines the situation warrants an internal investigation, lots of considerations factor into how to conduct the investigation. To help, King & Spalding issued a General Counsel’s Decision Tree for Internal Investigations.
Should an internal investigation arise, the decision tree provides a reference with recommended practices and reminds companies that it should be used in conjunction with their internal policies. Among other things, the memo addresses considerations relating to data preservation concerns, structure of the investigation team, fact gathering and memorializing investigation findings. One section of the memo that in-house members may find particularly helpful is a chart outlining various internal and external constituents and their interest in the investigation – it can serve as a starting point for a checklist of who needs to be informed when.
More on “Proxy Season Blog”
We continue to post new items on our blog – “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:
One skill that gets mentioned as an area of improvement for boards relates to IT or cyber expertise. Perceived shortcomings in any board risk oversight responsibility can often come with consequences – in connection with losses from Greensill Capital and Archegos, the recent resignation of the risk committee chair of Credit Suisse is one example. A recent Bloomberg article discusses board oversight of cyber risk and notes some boards have been adding “cyber experts” while others say boards need cyber literacy.
In terms of approach for providing cyber risk oversight, each board will decide what’s appropriate given the company’s particular facts and circumstances. When it comes to board cyber literacy, boards frequently rely on management to help the board stay up to date about cyber risks, while the article said some boards are turning to cyber consultants for help. The article includes a reminder from the head of Accenture Security that cyber literacy is a two-way street and management’s role shouldn’t be overlooked:
Boosting cyber literacy isn’t just about directors learning the language of security but ensuring that chief information security officers can explain their work. ‘We have to ensure the CISO can communicate effectively at the board level, not in bits and bytes.’
A 2019 report from University of California, Berkeley and Booz Allen Hamilton based on interviews with directors about beliefs, practices and aspirations relating to cybersecurity oversight recognizes the tension around the need for board cyber expertise. The report suggests boards re-assess decisions relating to cybersecurity oversight on a regular basis to take account of changes in internal and external risks. At the time of the study, a majority of directors interviewed leaned toward distributed cyber expertise among board members. The report provides these considerations for boards that might be leaning toward an “everyone” or a “cyber-expert” approach:
Leans “Everyone”
– Ensure adequate training and education is defined, used, and kept up-to-date
– Engage external third-party expertise for specialized knowledge, and most importantly to prevent group-think traps
– Amplify accountability for cyber oversight in subset groups (likely committees)
Leans “Cyber-Expert”
– Seek out specific board members who offer deep specialized knowledge of cyber (e.g., crisis management, technology, and threat landscape)
– Prioritize full board discussion of cyber oversight over committee delegation
– Engage external subject-matter experts to test and enhance internal expertise
Dr. Jessica Wachter Named SEC Chief Economist and Director of DERA
Earlier this week, the SEC announced that Dr. Jessica Wachter has been appointed as the agency’s Chief Economist and Director of the Division of Economic and Risk Analysis (DERA). Since 2003, Dr. Wachter has been a professor at the Wharton School and holds the Dr. Bruce I. Jacobs Chair of Quantitative Finance and is a Research Associate with the National Bureau of Economic Research. Dr. Wachter is recognized as one of the leading academic researchers on financial markets. In this role, Dr. Wachter will lead DERA as it provides economic analysis to support decision-making at the SEC.
For those looking for a resource to help audit committees evaluate the company’s external auditor, the Center for Audit Quality recently released an updated version of its external auditor assessment tool. Audit committees of course meet regularly with the company’s external auditor and engage in informal assessment of the auditor throughout the year. But, when it’s time for the audit committee to conduct a more formal annual assessment, CAQ’s assessment tool can be used as a guide.
For audit committee’s looking for input about factors to consider when assessing the auditor, the guide offers a good starting point. CAQ’s assessment tool includes sample questions to help the committee assess the external auditor and then also discuss as part of its annual evaluation of the auditor. Questions cover topics relating to, among other things, the engagement team skill and responsiveness, engagement team succession, workload, audit plan and risks, scope and cost considerations, audit quality, interaction with the external auditor and auditor independence, objectivity and professional skepticism.
When assessing the external auditor, CAQ suggests the audit committee also seek input from management. To help with this process, the assessment tool includes a sample rating form for members of management to complete. The rating form solicits feedback to a variety of factors relating to the external auditor’s quality of service provided, sufficiency of resources, communication, objectivity, etc.
Back at the end of March, Liz blogged about introduction of a resolution calling for repeal of last year’s Rule 14a-8 amendments under the Congressional Review Act (CRA). Although the resolution has been introduced, a Congressional webpage for the resolution shows the Senate Committee on Banking, Housing & Urban Affairs hasn’t taken any action on the bill since it was introduced.
The lack of action on the resolution may be partially what led about 200 investor advocates to reportedly write to every member of Congress urging support of the CRA resolution to nullify the shareholder proposal rule amendments. It’s unclear whether this investor campaign will have any impact and move the resolution forward. Among those that want the amendments nullified there’s a sense of urgency because time is limited for the Senate to act without the threat of a filibuster.
The CRA’s “fast track” procedures for the Senate to act and approve the resolution nullifying the amendments can be complicated but the folks at the GW Regulatory Studies Center provided some insight to help explain:
There is a deadline as far as the Senate still having access to its “fast-track” authority (which makes the resolution filibuster proof). This is referred to as the Senate action period.
As of yesterday, there were about 10 Senate session days left until that deadline. The calculation is somewhat bothersome, but it’s essentially the 75th day of session in the Senate for this Congress. After this date, the Senate could theoretically still vote on it, but it would be subject to all of the usual delay tactics (the filibuster) and would be unlikely to get through.
10-K/A: Covid-19 Factors into 2020 Stats
A recent Audit Analytics blog reviews reasons behind companies filing amended Form 10-Ks last year. When compared to 2019, 2020 saw an uptick in amended 10-Ks – up 34% and Audit Analytics attributes this increase to the impact of the Covid-19 pandemic on regulatory filings and annual meeting schedules. In fact, the pandemic factored into the frequency of the top 2 reasons for filing 10-K/As in 2020.
As it has been for the last 7 years, the most common reason for filing a 10-K/A was a need to include Part III information due to an inability of companies to get their definitive proxy materials on file within 120 days of the fiscal year end. In 2020, almost 9% of these filings specifically referenced Covid-19 as the reason for their delayed proxy filing or postponed annual meeting. The next most common reason for filing a 10-K/A was to include disclosure related to the 45-day filing extension first granted by the SEC back in March of last year in response to the pandemic. Here are the top 5 reasons companies filed 10-K/As last year:
– Part III information – 48.2%
– Covid-19 extension – 8.9%
– Exhibits & signatures – 7.9%
– Auditor’s Report – 6.7%
– Subsidiary financial statements – 5.6%
Transcript: “The Top Compensation Consultants Speak”
We’ve posted the transcript for our recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners shared their thoughts on:
– Key Issues & Considerations for Compensation Committees Now
– Human Capital Management Topics Compensation Committees are Discussing Now
– Setting Goals Under Uncertain Circumstances
– Balancing Internal Needs with External Pressures
– Using a ‘Resiliency Scorecard’ During COVID-19 & Beyond
A forthcoming academic article in the Duke Law Journal asserts that well-timed gifts of stock by insiders continue to be widespread – a phenomenon John blogged about a few years ago. The data continues to suggest that this could result from a combination of gifting based on MNPI as well as backdating.
What’s the big deal? Well, although charitable organizations benefit greatly from insider stock gifts, the logic goes that when the donations are made just before disclosure that causes a drop in stock price, insiders personally benefit from “inflated” charitable tax deductions and reputational accolades while avoiding the loss in value. Similar to conventional insider trading, it creates an uneven playing field and undermines public trust in the market.
The study also suggests that large investors engage in this “insider giving.” It doesn’t provide a clear definition for this group – although the authors discuss controlling shareholders, venture capitalists and activist hedge funds. Here’s an excerpt:
We find that large shareholders’ gifts are suspiciously well timed. Stock prices rise abnormally about 6% during the one-year period before the gift date and they fall abnormally by about 4% during the one year after the gift date, meaning that large shareholders tend to find the perfect day on which to give.
These results are almost certainly not the result of luck. To the contrary, our research lets us identify information leakage as the most important cause of these results: executives seem to provide large shareholders with material non-public information, who then use it to time gifts.
The study’s authors believe that problematic “insider giving” thrives due to lax reporting & enforcement. To curb potential misdeeds, they say that the SEC should make gifts subject to the same 2-day reporting requirement that applies to purchases & sales. They suggest a couple of potential alternatives such as potential exceptions for “small” gifts or applying the 2-day reporting requirement to gifts made to charities controlled by the donor or that otherwise raise red flags and then a 5-day window for most other gifts.
This would definitely make things harder for those of us in compliance. An inadvertent miss of a short reporting window can be embarrassing and draw unwanted attention – right when you’re also working to make the filing. The authors also contend that stricter reporting requirements wouldn’t chill legitimate stock gifts, but insiders and charities might feel differently.
Our “Insider Trading Policies Handbook” urges caution when considering whether an insider can gift shares at a time when they possess MNPI. We recommend dealing expressly with that in your policy so that you don’t end up having to make difficult case-by-case decisions about whether gifts are permitted. If transactions are collapsed in a way that makes it look like an insider has benefited, at the very least the company could suffer negative publicity. And studies like this could draw even more attention to the issue.
10b5-1 Plan Primer – With Design Tips!
John blogged last week about Rule 10b5-1 plans – the House of Representatives passed proposed legislation calling for the SEC to study potential revisions to the rule. With calls for more transparency on 10b5-1 plans, a new WilmerHale memo (pg. 24) provides a primer on the technical requirements for 10b5-1 plans, then includes a couple of plan design suggestions for directors and officers who might consider entering into a plan:
– Keep selling formulas simple, this can help minimize the need for clarification or changes later that could constitute amendments
– Keep investor relations considerations in mind that could arise with frequent plan sales or from use of a plan that could result in a single large sale that’s triggered by the company hitting a significant milestone or from market volatility that’s unrelated to company news
The process for putting a 10b5-1 plan in place varies from company to company, including whether plans require review and approval, whether insiders are required to use 10b5-1 trading plans when conducting transactions involving company securities, length of cooling off periods, etc. The report includes survey data (co-sponsored by Deloitte Consulting and NASPP) about these and other 10b5-1 trading plan practices, here are some of the results:
98% require plans to be reviewed (or reviewed and approved)
10% require insiders to use plans
79% require a cooling-off period between plan adoption and commencement of trading – the most common waiting period being 1 – 3 months (45%) followed by the next open window period/fiscal quarter (32%)
For more on Rule 10b5-1 Plans, check out our “Rule 10b5-1 Trading Plans Handbook” – it covers the basics of the rule and includes common Q&As that crop up every so often. The handbook is available online for free to members of TheCorporatecounsel.net, you’ll find a list of all of our handbooks by clicking on “Handbooks” in the blue bar at the top of the home page.
Our May E-Minders is Posted
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Proxy distribution costs can be a pretty big line-item for corporate secretary departments (or sometimes treasury departments), and a recent rule proposal that could affect them has been flying under the radar. For anyone who hasn’t been tasked with fielding questions about invoices relating to proxy distribution, count your blessings. The invoices include a myriad of charges with the proxy distribution service provider including a key to help explain the fees, with some being fee maximums established by the NYSE.
Last December, in a rulemaking proposal submitted to the SEC, NYSE indicated that it wants out of the business of setting the proxy distribution fee schedule and instead wants FINRA to take on that responsibility.
The portion of proxy distribution fees established by the NYSE haven’t changed since 2013. Still, questions about the invoices seem to arise nearly every year and among other things, distribution related costs like postage rates, mail class delivery, the number of packages, not to mention the weight of your annual meeting materials can change. Although the maximum fees established by the NYSE have remained stable, depending on what happens with the NYSE’s proposal, the fees established by NYSE could be on the verge of changing too.
As it turns out, FINRA doesn’t want the responsibility either. The SEC has instituted proceedings to determine whether to approve or disapprove the NYSE proposal and for now responsibility still sits with the NYSE. Various organizations have submitted comment letters on the proposed rulemaking, with some noting how this proposed change could impact issuers. Here are a few notable letters:
The comment period on the proposed rulemaking closed last week, although for anyone wanting to weigh in on this hot potato, the SEC typically welcomes comments even late in the process.
Tweaks to NYSE Related Party Transaction Rule
A few weeks ago, I blogged about amendments the NYSE Listed Company Manual relating to shareholder approval requirements. While that blog focused on amendments relating to equity issuances in private placement transactions, the amendments also tweaked NYSE Listed Company Manual Section 314.00, which requires related party transactions to be approved by an independent board committee. The tweaks to Section 314.00 are important to note before they completely slip under the radar.
Over the years, many have interpreted the NYSE Rule about related parties as being consistent with the disclosure requirement in Reg S-K Item 404. As amended, NYSE Section 314.00 clarifies that for purposes of this rule, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 – but without regard to the transaction value threshold of that provision. The amended rule also requires “prior” review of related party transactions to make sure they’re not inconsistent with interests of the company and its shareholders.
So does the removal of the $120,000 threshold from this rule mean that NYSE-listed companies need to have their audit committee (or whichever independent body of the board that reviews related party transactions) review and approve nearly all potential related party transaction regardless of dollar value? Maybe not. This Davis Polk memo explains how you might be able to get comfortable without it:
The revisions raise the question of whether the audit committee should review and approve even de minimis transactions involving directors, officers and other related parties. Because Item 404 specifies that the related party must have a “material interest” in the transaction—in addition to the transaction value threshold of $120,000—we believe companies may conclude that for many small transactions, there is no such material interest and so prior audit committee approval is not necessary. Depending on the relevant industry and a company’s ordinary business operations, companies may wish to review the types of transactions they regularly engage in with related parties in order to ensure continuing compliance with NYSE’s rules.
For companies that take a more conservative approach to pre-approval, it’s probably worth revisiting your related party transaction policy to consider whether to expand the list of pre-approved transactions. If some common arrangements are omitted only because of their low dollar amount, you would want to consider adding those.
Tomorrow’s Webcast: “The Leveraged ESOP as an Exit Alternative”
Tune in tomorrow for the DealLawyers.com webcast – “The Leveraged ESOP as an Exit Alternative” – to hear Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman and Steve Karzmer of Calfee, Halter & Griswold discuss benefits and structuring, financing and operational issues to take into account with leveraged ESOP transactions.
We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
No registration is necessary – and there is no cost – for this webcast for DealLawyers.com members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Yesterday, the Senate voted to confirm Gary Gensler’s nomination as the next SEC Chair by a 53-45 vote. Gary will likely be sworn in early sometime early next week – and many expect he will hit the ground running.
Usually, when the Senate approves a new SEC Chair, the person is approved to serve in that capacity for a 5-year term. In this case, the Senate approved Gary to serve only for the remainder of former SEC Chair Jay Clayton’s term, which ends on June 5th of this year. An SEC Commissioner can serve up to 18 additional months following expiration of their initial term if a successor isn’t named – but another Senate vote is required to serve beyond that.
Although there’s no imminent plan for another Senate vote on this position, the Senate Banking Committee already cleared the reappointment of Gary for a second five-year term ending on June 5, 2026 when they advanced his nomination. So it’s on the Senate calendar, but the vote is subject to Gary’s commitment to respond to testify before any Senate committee. This Cooley blog gives more detail about the confirmation hearing and potential priorities for a Gensler SEC.
ESG Reports: 7 Tips for a “Health Check”
I’m happy to share this guest post from Ashley Walter, JT Ho and Carolyn Frantz of Orrick – with 7 tips for conducting a “health check” on your ESG report:
Environmental, Social and Governance (ESG) reports are becoming “table stakes” for public companies, regardless of a company’s industry or market capitalization. Whether you have been publishing a report for years or you haven’t started the process yet, given recent SEC developments, and increased focus on ESG by various stakeholders, including investors, proxy advisors, commercial partners, customers and employees, now is the time to revisit and reassess your disclosure.
In this post, we offer guidance on how companies can perform a “health check” on their ESG reports:
1. The horse must come before the cart. As a result of the focus on disclosure by investors and other stakeholders as well as proxy advisors and ESG ratings organizations, it is easy for companies to fall into the trap of prioritizing disclosure over the underlying ESG framework that forms the basis for such disclosures. Companies should focus on implementing a tailored framework that identifies key performance measures, establishes effective oversight at the Board, committee and management levels, addresses commercial requirements, is responsive to stakeholder interests, and ensures legal compliance.
2. Review disclosure controls and procedures. Companies should consider employing some the same disclosure controls and procedures in reviewing and approving an ESG report that they employ in reviewing and approving SEC filings, which may require internal and external audit review. Given the amount of information included in such filings and the critical business issues addressed, the publication of an ESG report can expose a company to risk if the report is not vetted properly. Having disclosure controls and procedures in place will also enable an auditor to provide assurance with respect to the company’s disclosures, if the company deems that advisable.
3. Be cognizant of language describing the purpose of ESG measures and the timeline for implementation of ESG goals. Throughout its pages, an ESG report will, in various ways, address the connection between the ESG measures described in the report and the impact on value for stakeholders – this relationship must be articulated carefully and should be consistent across the report. Statements closely tying representations about ESG to financial performance may heighten litigation risks if those representations are later considered misleading. In addition, to the extent forward-looking ESG goals are presented, any timelines for implementation should be realistic and caveated appropriately. Special attention should be paid to this issue when it comes to letters composed by members of management or the board that are included in the report.
4. Refrain from employing the concept of materiality. Given the SEC’s stated intention to revise its guidance regarding what may be considered material with respect to climate-related disclosure, companies should refrain from using the word “materiality” in their ESG reports so that the term is not conflated with materiality as defined by the SEC. Alternatives include referring to “priority,” “significant,” or “relevant” ESG factors.
5. ESG report or website? Certain companies have opted to provide their sustainability disclosures on internal website pages as opposed to within a separate published report. While this approach enables a company to update the material more easily and avoid some of the costs associated with preparing a stand-alone report, it’s also possible that it may be more difficult for proxy advisors, ESG ratings organizations, investors and others to quickly find relevant information and, more importantly, it may work against the company’s efforts to ensure consistent disclosure controls and procedures are applied with respect to ESG disclosure.
6. Leverage your lawyer. Legal counsel can advise the company on governance, board fiduciary duties and director liability, and litigation risks associated with ESG programs and disclosures. Any communications with legal counsel may be privileged. Company counsel should be involved in a targeted fashion at key points in the process – most importantly at the outline stage, after an initial draft has been put together by the company/its consultant(s), and before the report is finalized.
7. Should we hire a consultant? There are many different types of firms that offer ESG reporting services, including traditional management consultancies, ESG-specific management consultancies, communications firms and engineering firms. Each brings a unique perspective and set of skills. A company should identify the resources it has internally and through its existing advisors and consider hiring a consultant to extent there are any gaps in its capabilities, and the company should select the type of consultant based on the consultant’s skill set and the nature of the identified gap(s).
Companies are under increasing pressure to publicly disclose a broad and detailed set of information regarding their ESG practices. Such information is used by institutional investors in their investment decisions by all major proxy advisors in developing their reports for shareholders (and may guide voting recommendations), and may also be used by potential and current commercial partners, consumers and employees. Given the potential opportunities and risks, companies preparing an ESG report for the first time should exercise great care in determining content and drafting language, and companies that have publishing reports for some time should reexamine their disclosures in the light of recent developments.
This Mediant announcement caught my eye as it says the firm offers proxy voting by voice with Alexa. It’s only available to a small subset of companies and retail shareholders right now – those who use Mediant – and shareholders with access to an Amazon Alexa device so they can tell Alexa their 12-digit control number in order to get access to voting. This could be big though – it could be a step up from voting by phone, especially if Broadridge ends up offering it down the road.
Retail voting is important because instances where retail shareholders tip the scales on a vote outcome do crop up – last year, I blogged about this on our “Proxy Season Blog.” The Alexa feature to vote all proposals at once could help companies get a positive retail turnout, because the default is to vote with management on everything. With Alexa, the possibilities for voice-enabled automation are seemingly endless, right now it’s unclear whether companies could also set up reminders. It’s kind of a fun concept, although I was disappointed that I didn’t have a 12-digit control number to test it…
Division of Examinations Observes Instances of ESG Proxy Voting Inconsistencies
Last week, the SEC’s Division of Examinations issued a risk alert with observations from its review of investment advisers, investment companies and funds that offer ESG investment products and services. The Division examined firms to evaluate whether they accurately disclose their ESG investment approach, and whether they implement policies, procedures and practices that synch with their ESG-related disclosures. The risk alert describes some of the Division’s observations relating to deficiencies and internal control weaknesses, including this excerpt about inconsistencies in proxy voting with advisers’ stated approaches:
The staff observed inconsistencies between public ESG-related proxy voting claims and internal proxy voting policies and practices. For example, the staff observed public statements that ESG-related proxy proposals would be independently evaluated internally on a case-by-case basis to maximize value, while internal guidelines generally did not provide for such case-by-case analysis. The staff also noted public claims regarding clients’ ability to vote separately on ESG-related proxy proposals, but clients were never provided such opportunities, and no policies concerning these practices existed.
The takeaway here is that companies, who think they may be doing and disclosing what certain investment companies and funds will value and evaluate, might not be able to count on these firms following their proxy voting guideline of a case-by-case analysis for a particular proposal. Whether this means the vote would be with management or not isn’t clear but when voting determinations are “case-by-case,” companies doing the right thing might think there’s a chance votes would be cast with management’s recommendation. This discrepancy highlights the need for companies, particularly those with ESG-related ballot items, to actively engage with shareholders to help stay on top of how different investment firms intend to cast their votes.
Commissioner Hester Peirce released a Public Statement about the ESG risk alert providing some added context. With respect to the risk alert discussion about inconsistencies in proxy voting, Commissioner Peirce reminds readers to keep the Commission’s previously issued proxy voting interpretive releases in mind. Commissioner Peirce notes that ‘While not applicable only to advisers using ESG strategies, these Commission statements remind advisers that proxy voting, when such authority is undertaken on behalf of the client, is subject to advisers’ fiduciary duty and must be undertaken in the client’s best interest.’
Corp Fin & OCA Staff Clarify How to Account for SPAC Warrants – Restatement Analysis Coming Your Way?
Warrants are a standard part of how SPACs raise money, and they’re often classified on balance sheets as equity. But as part of the SEC’s ongoing scrutiny of these deals – and as a follow-up to statements issued in early April – Acting Corp Fin Director John Coates and Acting Chief Accountant Paul Munter issued a Joint Statement on Monday saying that these instruments might instead need to be classified as liabilities, which means that they need to be revalued every period and cause fluctuations in net income that are complicated to explain.
That’s a big issue, especially for SPACs that have been filing financials for many reporting periods that could now be considered erroneous, and also for SPACs that are trying to go effective with registration statements.
When it comes to accounting for warrants, the statement discusses fact patterns and specific warrant terms that can impact whether the warrants can be classified as equity or as an asset or liability that requires a fair value assessment each period. Equity classification requires that the instrument (or embedded feature) be indexed to the company’s own stock (e.g., the payoff can’t depend on who the holder is). Another common situation that GAAP treats as a liability is if an event not within the company’s control could require net cash settlement. There’s a big emphasis on this being a “facts & circumstances” analysis – for each entity and each contract. Here are a couple of examples from the statement:
We recently evaluated a fact pattern relating to the terms of warrants that were issued by a SPAC. In this fact pattern, the warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, OCA staff concluded that, in this fact pattern, such a provision would preclude the warrants from being indexed to the entity’s stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.
We recently evaluated a fact pattern involving warrants issued by a SPAC. The terms of those warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.
Even though it may be painful, if you haven’t already talked with your auditors about this, it’s probably time to give them a call. If you determine there’s a material error in previously filed financial statements — such as a reclassification of warrants from equity to a liability that also experienced a material fluctuation in value — the statement includes a reminder about information to include in an amended Form 10-K and any subsequent Form 10-Qs. It also reminds companies of their need to maintain internal controls over financial reporting and disclosure controls and procedures to determine whether those controls are adequate.
This latest statement could have the effect of slowing the deluge of SPAC transactions, as companies will need to wrangle with their accountants and others over terms of any warrants. If you have questions about technical accounting matters involving SPAC warrants, you should contact the Office of the Chief Accountant – and for questions about restating financial statements, contact Corp Fin’s Chief Accountant’s Office.
If you’re looking for an easy way to get up to speed on rules and guidance relating to the confidential treatment process, check out the latest “Deep Dive with Dave” podcast.
In this 28-minute episode, Dave Lynn and Dave Meyers of Troutman Pepper provide a confidential treatment workshop with tips about how to navigate the confidential treatment process. Topics include:
– Overview of the Confidential Treatment Process
– The 2019 SEC Rule Changes – The “Ask for Forgiveness” Approach
– The Filing Review Process
– Seeking Extensions of Confidential Treatment Requests
– Farewell to Competitive Harm
Last week, John blogged about the March-April Issue of “The Corporate Counsel,” and the companion 22-minute podcast is now also available.
Earlier this month, following a comment period during which it received no comments, the SEC approved amendments to the NYSE Listed Company Manual relating to shareholder approval requirements for related-party equity issuances and private placements exceeding 20% of a company’s outstanding stock or voting power. The amended requirements bring the NYSE’s shareholder approval rules into closer alignment with Nasdaq rules and provide listed companies with greater flexibility to raise capital.
The NYSE initially issued a waiver to its shareholder approval requirements back in April 2020 as companies were trying to raise capital during the Covid-19 pandemic – the waiver was extended a couple of times and the rule amendments are substantially the same as the waivers. Steve Quinlivan’s blog details the amendments relating to Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual. This excerpt summarizes changes to Section 312.03(b):
– Shareholder approval would not be required for issuances to a Related Parties’ subsidiaries, affiliates or other closely related persons or to any companies or entities in which a Related Party has a substantial interest (except where a Related Party has a five percent or greater interest in the counterparty, as described below).
– Shareholder approval would be required for cash sales to Related Parties only if the price is less than the Minimum Price.
– Issuances to a Related Party that meet the Minimum Price would be subject to shareholder approval for any transaction or series of related transactions in which any Related Party has a five percent or greater interest (or such persons collectively have a 10 percent or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the present or potential issuance of common stock, or securities convertible into common stock, could result in an increase in either the number of shares of common stock or voting power outstanding of five percent or more before the issuance.
“Robust” Disclosure about Virtual Shareholder Meetings: Glass Lewis Expectations
Earlier this year, I blogged about some refinements Glass Lewis made to its disclosure expectations for virtual shareholder meetings. Virtual shareholder meetings were new for many last year and this year, expectations relating to information about the meetings are likely higher. For companies short on resources, some may have relied on an if-it-ain’t broke, don’t-fix-it-model, which we’ve heard may have caught some companies off-guard when receiving a Glass Lewis recommendation “against” members of their nominating committee. As a reminder, here’s an excerpt from a Glass Lewis blog entry describing their expectations:
From 2021, our expectations of companies holding virtual meetings globally are as follows:
Glass Lewis believes that virtual-only meetings have the potential to curb the ability of a company’s shareholders to meaningfully communicate with company management and directors. However, we also believe that the risks of a reduction in shareholder rights can be largely mitigated by transparently addressing the following points:
When, where, and how shareholders will have an opportunity to ask questions related to the subjects normally discussed at the annual meeting, including a timeline for submitting questions, types of appropriate questions, and rules for how questions and comments will be recognised and disclosed to shareholders.
In particular where there are restrictions on the ability of shareholders to question the board during the meeting – the manner in which appropriate questions received prior to or during the meeting will be addressed by the board; this should include a commitment that questions which meet the board’s guidelines are answered in a format that is accessible by all shareholders, such as on the company’s AGM or investor relations website.
The procedure and requirements to participate in the meeting and/or access the meeting platform.
Technical support that is available to shareholders prior to and during the meeting.
We believe that shareholders can reasonably expect clear disclosure on these topics to be included in the meeting invitation and/or on the company’s website at the time of convocation.
In the most egregious cases where inadequate disclosure of the aforementioned has been provided to shareholders at the time of convocation, we will generally recommend that shareholders hold the board or relevant directors accountable. Depending on a company’s governance structure, country of incorporation, and the agenda of the meeting, this may lead to recommendations that shareholders vote against:
Members of the governance committee, or equivalent (if up for re-election);
The chair of the board (if up for re-election); and/or
Other agenda items concerning board composition and performance as applicable (e.g. ratification of board acts).