More than three years after the SEC’s Advisory Committee on Small and Emerging Companies issued a recommendation, the SEC voted 3-2 to propose a conditional exemption from the broker registration requirements of Section 15(a) of the Exchange Act for “finders.” The proposed exemption would permit “finders” to engage in certain capital raising activities involving accredited investors and is intended to provide clarity to smaller businesses and their investors, and “finders” who assist them in raising capital. Under the proposed exemption, “finders” would be classified in two tiers with conditions tailored to the scope of their respective activities. Here’s the proposing release. This excerpt from the SEC’s press release summarizes the two classes of finders – see the complete press release for a summary of the applicable conditions:
Tier I Finders
A Tier I Finder would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12 month period. A Tier I Finder could not have any contact with a potential investor about the issuer.
Tier II Finders
A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor.
For additional information, the Office of the Advocate for Small Business Capital Formation posted a video and a chart showing a comparison of some of the permissible activities, requirements and limitations for Tier I Finders, Tier II Finders, and registered brokers. The proposal is subject to a 30-day comment period.
Over the years, many small companies needing capital have found it difficult to determine when it’s appropriate to engage “finders.” In her statement in support of the proposal, Commissioner Hester M. Peirce found a way to acknowledge Eddie Van Halen’s “ebullient guitar-playing” by thanking Chairman Jay Clayton, the Division of Trading and Markets and others “for recognizing that the make-up-your-own-path approach works better for rock ‘n’ roll than it does for finders” – describing the current approach for finders as being ad-hoc and based on gut-feeling and guideposts gleaned from no-action letters and enforcement actions. Commissioner Peirce said the proposal provides a framework for finders and questioned whether the scope of the proposal should be expanded to secondary offerings.
Commissioners Allison Herren Lee and Caroline A. Crenshaw each issued dissenting statements criticizing the proposal for a lack of empirical support and investor protection concerns. In her statement, Commissioner Lee said she could have supported a rulemaking process that proposed a scaled registration format that required some form of record keeping and examination authority. Commissioner Lee continued by saying the proposal relies too much on the continued applicability of antifraud provisions as comfort for investor protections.
California Board Diversity Mandate Faces Legal Challenge
A couple of months ago, I blogged about California Assembly Bill (AB) 979 that would require public companies headquartered in California to include directors from “underrepresented communities” on their boards. California’s Governor Gavin Newsom signed it into law last week and it’s quickly been challenged in court. This Judicial Watch press release says that the group filed a lawsuit challenging the enforceability of AB 979. Cydney Posner’s blog provides a good overview of the lawsuit and notes that it’s patterned after the lawsuit challenging California’s board gender diversity law, SB 826:
Framed as a “taxpayer suit” much like Crest v. Padilla I, the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota and violates the California constitution.
The complaint requests entry of a judgment declaring any expenditures of taxpayer funds to implement or enforce AB 979 to be illegal and issuance of an injunction permanently prohibiting the Secretary from expending taxpayer funds to enforce or implement the provisions of the legislation. Presumably, California will file an answer contesting these claims; however, unless and until a court issues the requested injunction, the law will go into effect.
This Wilson Sonsini blog outlines the law and discusses potential reporting obligations. The blog suggests companies subject to the law start planning for compliance. For companies that don’t already have director diversity data, the blog says they may want to consider adding a question to their annual director and officer questionnaire to solicit the information. Not too long ago, I blogged about the quest for director diversity information and included one sample D&O question for consideration – and, this Dorsey blog includes another sample question.
Reg S-K “Modernization” Amendments Published in Federal Register Today!
Ever since the SEC adopted amendments to modernize Items 101, 103 and 105 of Regulation S-K in August, many have been watching – and waiting – for publication of the final amendments in the Federal Register. Thank you to John Newell of Goodwin Procter for posting this response in our Q&A Forum yesterday to questions about publication and the effective date of the amendments:
According to the Federal Register website, the amendments will be published on October 8, 2020. Thirty days results in an effective date of Saturday, November 7th.
That means that Form 10-Q reports and other filings submitted after 5:30 p.m. Eastern time on Friday, November 6th must comply with the amendments to Items 101, 103 and 105, to the extent applicable. Note that the EDGAR filing window for a same-day filing stamp closes at 5:30 p.m. Eastern time. The next filing day is Monday, November 9th, so filings made after the window closes but before 10 p.m. should comply with the amendments.
John followed up to say that already this morning, the rules have been posted. They provide for an effective date of Monday, November 9th, but that doesn’t change the fact that you’ll need to comply for anything filed after 5:30 p.m. Eastern Time on November 6th.
Late last year, some may recall when reports started surfacing of allegedly “fishy” comment letters submitted to the SEC ahead of the agency’s proxy advisor rulemaking. The Office of Inspector General recently issued a statement summarizing its investigation and concludes there was no wrongdoing. Here’s an excerpt:
Each person interviewed stated they willingly submitted a letter to the SEC and did not receive any compensation or benefit from anyone for doing so. Further, the investigation determined that an advocacy association for seniors solicited its members, current and former employees, and friends of the association’s employees to submit comment letters in response to proxy rulemaking proposals. The investigation also determined that a public affairs company working on behalf of another advocacy group solicited individuals to submit letters to the SEC about the proposed rule change. The investigation did not identify any author who did not in fact submit a letter to the SEC or who disagreed with the content in the letter they submitted to the SEC.
The reports of the alleged fake-comment letters caught the attention of a lot of people. Back in July, Senator Chris Van Hollen (D-Md.) inquired about the letters but things were fairly quiet until the OIG issued its statement. The OIG’s statement says it has closed the investigation and that no evidence was found to indicate any criminal violation.
Circle the Wagons: Create Assurance Around ESG Data
We’ve blogged before about the importance of oversight and disclosure controls related to sustainability disclosures. Just last week, John blogged about CII’s statement calling for use of standard reporting metrics, which also said over time, companies should obtain external assurance of sustainability disclosures. This follows a 2019 McKinsey survey that found 97% of investors surveyed said sustainability reports should be audited and 67% said those audits should be as rigorous as financial audits. A recent EY survey of nearly 300 institutional investors reiterates the importance of the disclosures coupled with the credibility of the information. According to EY’s report, investors are stepping up their game in terms of assessing company performance using non-financial factors. High-level data points from EY’s report include:
Overall, 98% of investors surveyed evaluate non-financial performance based on corporate disclosures, with 72% saying they conduct a structured, methodical evaluation. This is a major leap forward from the 32% who said they used a structured approach in 2018.
Investors are also building their understanding of the ESG reporting universe, factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework. In fact, this research found strong evidence that investors see the TCFD framework as a valuable approach for wider non-financial disclosures, beyond climate-related information.
The research found investors have a significant appetite for an independent lens on ESG performance. For example, 75% said they would find value in assurance of the robustness of an organization’s planning for climate risks.
The report offers three suggestions to help companies meet investor expectations:
(1) Build a stronger connection between non-financial and financial performance. Investors can focus on building more credible and nuanced approaches to understanding what influences long-term value for certain sectors and companies, while companies themselves can focus more on their materiality — reporting on what environmental, social and economic factors are most relevant to their stakeholders and could impact their ability to create value over the longer term.
(2) Build a more robust approach to analyzing the risks and opportunities from climate change and the transition to a decarbonized future, and communicate this more comprehensively through TCFD reporting. Critical actions range from understanding the resilience of business strategies and assets under a range of possible climate scenarios, to assessing avenues for capitalizing on the economic opportunities of a decarbonized future – including attracting and accessing capital.
(3) Instill discipline into non-financial reporting processes and controls to build confidence and trust. Establishing effective governance practices and seeking independent assurance of non-financial processes, controls and data outputs can help build trust and transparency with investors. This is an area where CFOs and their finance teams — which have extensive experience in establishing processes, controls and assurance of financial information — can bring their best practices and experience to bear. The input of CROs and risk teams can also be valuable, as can treasury function input when green finance is involved.
Tomorrow’s Webcast: “CFIUS After FIRRMA: Navigating the New Regime”
Tune in tomorrow for the DealLawyers.com webcast – “CFIUS After FIRRMA: Navigating the New Regime” – to hear Wilson Sonsini’s Stephen Heifetz and Hogan Lovells’ Anne Salladin discuss how to deal with the enhanced national security review environment resulting from implementation of 2019’s Foreign Investment Risk Review Modernization Act.
PwC issued its annual survey of nearly 700 U.S. directors. The survey covers a lot of ground and identifies several areas of opportunity for boards, including those relating to crisis management and board refreshment. Despite identifying problem areas, the survey’s introduction says the pandemic offers an opportunity for boards to leverage the crisis to create change in terms of board practices, diversity & inclusion efforts and company strategies and priorities. Here’s the key findings:
– Even though directors gave management high marks on Covid-19 response, including supply chain interruptions, only 37% of directors say their board fully understands the company’s crisis management plan – PwC suggests boards leverage their companies’ experiences to date in 2020 to look back and evaluate what worked, what didn’t and what needs to improve so they’re prepared for the next chapter
– 84% of directors agree that companies should be doing more to promote gender and racial diversity in the workplace but only 39% support including D&I goals in company pay plans
– 67% of directors say issues like climate change should be considered when developing company strategy – up from 54% last year – but only 38% say ESG issues have a financial impact on the company
In terms of board refreshment, directors support it but also say boards aren’t doing a good job with it:
– 49% of directors say at least one board member should be replaced
– Only 49% say a board succession plan is shared with the full board
– 10% say their board doesn’t have a succession plan at all
– Directors cited board leadership’s unwillingness to have difficult conversations with underperforming directors and an ineffective process for director assessments most frequently as potential barriers to board refreshment
As more investors signal increased focus on board composition this coming proxy season, check out our “Board & Director Evaluations” Practice Area for checklists and current sample disclosures. Board succession is a frequent blog topic – here’s an entry outlining steps for better board succession and Liz recently blogged on “The Mentor Blog” about emerging trends for board evaluations.
CCPA Data Breach Lawsuits Underway
Many have been warning of a potential coming wave of litigation resulting from California’s Consumer Privacy Act because the CCPA gives data breach victims a right to bring a lawsuit against a company as a result of the breach and the company’s failure to implement “reasonable security measures.” A Mintz blog from earlier this summer also warns companies of potential trouble spots ahead while reporting of a CCPA class action lawsuit brought against an online stationery and craft company for a data breach. The company disclosed the data breach in May and the lawsuit alleges that the company failed to implement “reasonable security measures” to protect certain personal information. The blog says that over 73 million records were apparently stolen in the breach, which included passwords, names and other information. Given the volume of records that were breached, the blog notes potential severe penalties for the company:
The CCPA applies to many companies doing business in California, if they meet certain thresholds. If the company subject to the CCPA fails to implement “reasonable security measures,” and a data breach subsequently results, the victims of the data breach that are California residents can file a class action and seek significant statutory penalties, ranging from $100 to $750 per every single violation. In a breach involving 73.2 million records, these penalties quickly escalate to “bet the company” damages, if a large percentage of the putative class plaintiffs reside in California and can claim CCPA penalties.
The blog says we should anticipate a steady increase in the number of CCPA data breach class actions in the coming year – this Compliance Week article reports of a similar case involving Walmart. For the latest memos to help understand the final CCPA regulations and compliance requirements, check out our “Cybersecurity” Practice Area.
September-October Issue of “The Corporate Counsel”
The September-October issue of “The Corporate Counsel” print newsletter was just posted – and also sent to the printer (try a no-risk trial). The topics include:
– SEC Engages in a Flurry of Rulemaking
– Regulation FD Turns 20: Our Take
– Something to Look Forward to in 2021: Less Non-Issuer Financial Information
Last week, the SEC announced several enforcement actions as it wrapped up its fiscal year – here’s John’s blog about an alleged MD&A “Known Trends” violation. Earlier though, another SEC enforcement settlement slipped under the radar – in which the SEC alleged that a Nasdaq-traded company in the business of “live-adult entertainment clubs” and “military-themed Bombshells restaurants” failed to disclose a variety of perks and related party transactions and that a former director failed to disclose personal bankruptcies.
With the mix of allegations, the action provides a good case study on disclosure controls & procedures – and the SEC Enforcement folks took care to lay out in striking tables the value of perks allegedly received by execs versus what the company had disclosed in its proxy statements, including a Valentine’s Day trip by the CEO’s girlfriend to meet him when he was away on business. The press release summarizes the actions, and the 11-page order provides more color:
From FY 2014 through FY 2019, RCI failed to disclose a total of $615,000 in executive compensation in the form of perquisites. According to the order, these undisclosed perquisites included the cost of the personal use of the company’s aircraft and company provided vehicles, reimbursement for personal airline flights, charitable corporate contributions to the school two of the CEO’s children attended, and housing costs and a meals allowance for the CFO. In addition, the order finds that RCI failed to disclose related party transactions involving the CEO’s father and brother and a director’s brother. The order further finds that RCI failed to keep books and records that allowed it to report, and lacked sufficient internal controls concerning, these executive perquisites and related party transactions.
The former director served on the company’s audit committee and had filed two personal federal bankruptcy petitions that he failed to disclose to the company. The order involving the former director states that he also served as the audit committee financial expert and that he didn’t disclose the bankruptcy filings due to embarrassment and he didn’t want to embarrass the company. Once the company learned of the bankruptcy filings, the company asked him to step down from the board.
Without admitting or denying the SEC’s findings, RCI, the CEO and CFO consented to a cease & desist order and agreed to pay civil penalties in the amounts of $400,000, $200,000, and $35,000, respectively. With regard to the former director, he also consented to a cease-and-desist order and to pay a $30,000 civil penalty. The former director further agreed to be suspended from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after three years.
These cases provide a good synopsis of how important it is to have internal controls and checks & balances in place. The SEC’s order sheds light on RCI’s internal control issues – for instance, the company identified personal use of company aircraft as a tax issue by reporting income on the executives’ W-2 forms but then didn’t disclose the value of personal aircraft use in the company’s SEC filings. In another instance, the company didn’t properly account for the full value of automobile perquisites because the value disclosed only included depreciation amounts as incremental costs and didn’t include other costs such as fuel, maintenance, registration and insurance. And as this excerpt shows, the company took the inadvisable approach of relying on personal judgment when it came to reimbursement requests:
The company did not have internal controls or policies and procedures concerning expense reimbursement requests approvals because management never got down to that specific detail. In the absence of expense reimbursement controls, persons approving reimbursement requests would use their “judgment,” resulting in undisclosed compensation to officers.
Here’s an entry I blogged about last week on CompensationStandards.com: The SEC’s Division of Enforcement announced another perquisites enforcement action. The latest action involves Hilton Worldwide Holdings and is the second third perks-related enforcement action in just the last few months. We list perks cases in our CompensationStandards.com “Perks” Practice Area and you can see they aren’t too frequent – so to see two three in just the last few months is surprising.
The SEC’s order provides some of the details and says the company failed to disclose $1.7 million worth of travel-related benefits to its CEO and NEOs.
Items that Hilton incorrectly viewed as business expenses and paid for on behalf of its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses associated with personal use of corporate aircraft, and in the case of Named Executive Officers, expenses associated with hotel stays, as well as taxes related to such items. As a result, Hilton understated “All Other Compensation” portion of its Named Executive Officers’ compensation by an annual average of approximately $425,000 in the company’s 2016 – 2019 proxy statements.
According to the SEC’s order, Hilton’s system for identifying, tracking and calculating perquisites incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure.
The SEC’s order acknowledges that Hilton took prompt remedial acts and cooperated with the Commission:
Among other things, the order says after receipt of a written document and information request from the Commission staff, Hilton conducted an internal review of its perquisite disclosures and its system for identifying, tracking and calculating perquisites. On April 24, 2020, Hilton filed a definitive proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to its CEO in 2017 and 2018 and to other Named Executive Officers for the same time period.
Without admitting or denying the SEC’s findings, Hilton consented to the SEC’s cease-and-desist order, which requires Hilton to pay a $600,000 civil penalty.
Perks can be tricky – to help guard against this type of action, we have a 102-page chapter on Perks & Other Personal Benefits as part of Lynn & Borges’ “Executive Compensation Disclosure Treatise” posted on CompensationStandards.com. Also, if you missed the perks session at our “2020 Proxy Disclosure” and “17th Annual Executive Compensation” conferences, you can access the video archives or if you didn’t register to attend, you can register now to watch any and all sessions.
Transcript: “Non-GAAP Measures & Metrics: Where Are We Now?”
We’ve posted the transcript for our recent webcast: “Non-GAAP Measures & Metrics: Where Are We Now?” – it covered these topics:
– Background to SEC’s 2020 MD&A Guidance
– Operating Metrics vs. Non-GAAP Financial Measures
– Presenting the Impact of COVID-19: Acceptable & Unacceptable Adjustments
It wasn’t too long ago when Liz blogged about the SEC investigating the circumstances around Eastman Kodak’s announcement of a $765 million government loan. Earlier this week, the company issued a press release with an 88-page report to the special committee of Kodak’s board that was formed to internally investigate those events.
The report was prepared by Akin Gump over the course of what sounds like around-the-clock work spanning 6 weeks, in which it reviewed over 60,000 documents that included data searches of mobile devices, emails and text messages. It concludes that the company, and its officers, directors and senior management didn’t violate securities regulations or other relevant laws, breach their fiduciary duties or violate any of the internal policies or procedures. Even so, the report contains several corporate governance and procedural recommendations.
The report’s Reg FD analysis begins at page 70 and concludes there was no violation – among other reasons, because the early disclosure to the media was inadvertent and followed by the company’s posting of a DFC press release within 24 hours. But when it comes to the process that Kodak followed with respect to the release of information related to the LOI before the official release of the DFC Announcement, the report acknowledges there was room for improvement – and identifies several deficiencies that other companies may want to consider for their own policies & processes. In particular, counsel to the special committee found that there was:
(1) a lack of training for Kodak personnel who were dealing with the media,
(2) a lack of clear policies and procedures regarding processes that must be followed before a press release or media advisory can be revised or circulated to parties outside of Kodak,
(3) a general lack of sensitivity among certain Kodak employees regarding the need to carefully control the release of potentially MNPI regarding Kodak due to its status as a publicly traded company, and
(4) a lack of robust coordination with the legal department regarding outreach to the media leading up to and after the DFC Announcement.
Among other recommendations, the report urges the company to review and update its policies and procedures regarding the release of potentially MNPI and ensure that its public relations department is properly staffed and trained with respect to the appropriate protocols and best practices for handling interactions with the media on behalf of a public company. It also recommends that management ensure that the legal department has sufficient and appropriate resources.
Several media outlets issued stories about the report’s findings – here are a few – FT, CNBC, TheStreet.
Compliance Program Survey: Prioritizing People Issues Can Improve Effectiveness
Back in June, I blogged about NAVEX Global’s benchmarking data for compliance hotlines. For a more general look at compliance program benchmarking information, Navex issued a 72-page 2020 Definitive Risk & Compliance Benchmark Report based on a survey of over 1,400 risk and compliance professionals. One of the survey’s takeaways is that many compliance programs could take measures to improve effectiveness by prioritizing people issues. Here’s some of the survey’s high-level data points:
– How an organization’s senior leaders view its compliance function greatly impacts overall program performance as does the frequency with which compliance officers interact with the board
– Regulatory requirements primarily drive compliance program decisions but for programs looking to get better, emphasis should be on workplace culture, tone from the top and program automation as much or more than meeting legal requirements
– More than half of respondents said that their risk and compliance program periodically reports to the board and 9 out of 10 rated their board engagement as good or excellent
– With respect to training, 74% of organizations are investing in data privacy training and nearly one-half of respondents are planning on providing training on bribery, corruption, fraud and financial integrity in the next 2-3 years
In terms of disappointments, one finding was that although workplace culture is valued – 74% of respondents described ‘improving organizational culture’ as important, the issue ranked last when respondents prioritized their concerns. Along with culture, preventing and detecting retaliation ranked low among compliance program concerns even though it’s a top concern for both regulators and employees and the extent to which employees fear retaliation has consistently been a strong indicator of the health of an organization’s culture. The survey found only 39% of respondents labeled speaking up and fear of retaliation as top concerns and the number of respondents who intend on making retaliation prevention a priority in the coming year fell to 17%.
Questions for Boards to Keep Culture “Front & Center”
With actual time in the office still limited for many, a Deloitte/NACDonline memo reminds us of the importance of company culture as it can help ensure a company is able to respond to disruption while also supporting employees. Now that it appears not everyone has company culture high on their priority list – and because of its importance generally – the memo says it’s equally important that the board stay on top of culture risk. The memo suggests boards ask the following questions to help keep company culture “front and center:”
– Do we understand what culture is and why it’s important? When culture is aligned to business strategy, employees will work to support business goals, which can lead to competitive advantage
– Do we agree that the cultural tone is set from the top? HR is often charged with employing techniques to gauge culture while the executive team sets the ethical tenor for the company – boards should evaluate their executive team on culture, perhaps linking compensation or making it part of the succession process for executive leadership
– How do we know if our organization has a culture problem? Directors can perform due diligence on management’s assertions about culture by asking questions and seeking validation through data – they can also ask whether their organization is using emerging techniques to help assess culture, such as risk-sensing technology and behavior analytic tools
– Have we made culture a regular item on our board and committee agendas? Culture should be part of the board’s general risk oversight process – boards should move away from thinking of culture as a once-and-done exercise
Given the sensitivity of the issue, some may be grappling with how to approach gathering director diversity information. Investors are increasingly asking for board diversity disclosures, and earlier this week, ISS ESG announced that it’s including some director and NEO racial and ethnic diversity information in the proxy advisor’s data service offerings. A frequent suggestion heard at conferences is to add a question or two to the D&O questionnaire, which most know, isn’t as straightforward as it sounds. A recent Bryan Cave blog discusses this conundrum.
For those that aren’t keen on including another question in the D&O questionnaire, the blog says boards could consider addressing self-identification disclosures during a board meeting or in private conversations, and documenting the results in an appropriate manner, although individual director consent would still be needed for disclosures. For those that might update the D&O questionnaire, companies could socialize the topic before circulating an updated questionnaire so they can understand whether directors wish to proceed. The blog includes this example of a possible D&O question:
‘If you are willing to provide this information, please self-identify up to three classifications of racial/ethnic/gender/other diversity characteristics. Please note that if you choose to provide this information, you consent to possible public disclosure of the information, including in the company’s proxy statement, on our website or in response to inquiries from analysts, shareholders or the media.’
Alternatively, a separate consent checkbox could be added to the D&O questionnaire if a company wants to include only the first sentence of the sample question in order to gather diversity data and instead give directors a separate option to self-identify without consenting to public disclosure.
This September-October Issue of the Deal Lawyers print newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:
– The Road to Global Closing: Drafting Local Transfer Agreements in Cross-Border Carve-Outs
– Third Circuit Clarifies Requirements for Risk Factor Disclosures in Merger Proxies
– M&A Purchase Price Considerations in the Context of COVID-19
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online. – Lynn Jokela
As a “sneak peek” for our members who are attending our “Proxy Disclosure & Executive Pay Conferences” that are starting next Monday, September 21st, we have posted the “Course Materials” – 167 pages of practical nuggets. For conference attendees who are not members, the materials will be posted later this week on our conference platform – so those folks can use the mvp@markeys.com registration email to access the platform and navigate to the “View Course Materials” link on the homepage.
With so many pandemic and rule-related developments this year, the Course Materials are better than ever before! We don’t serve typical conference fare (i.e. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers go the extra mile!
Here’s some other info:
– How to Attend: There’s still time to register for our pair of upcoming conferences, and once you do, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here are the agendas for all three days! If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– Register for a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions – you can sign up here.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
Shareholder Proposal Rulemaking: SEC Open Meeting Postponed!
After blogging earlier this week about the SEC’s open meeting that had been scheduled for today when it would consider amendments to the shareholder proposal rules, late yesterday afternoon, the SEC issued a notice postponing the meeting. Postponement is perhaps a small consolation for those hoping the meeting wouldn’t be cancelled.
The Commission will now consider amendments to the shareholder proposal rules at an open meeting calendared for September 23. The notice says at the September 23 open meeting, the Commission will also consider whether to adopt amendments to the rules implementing its whistleblower program. It was just two weeks ago when the SEC cancelled its open meeting to consider amendments to the whistleblower program, which was the second time that rulemaking has been called off. So, presuming the Commission holds the open meeting next Wednesday – and both items stay on the agenda – it could be a pretty significant rulemaking day for the SEC.
Financial Reporting: Looking Again at Effects of Covid-19
Financial reporting in 2020 has turned out to be more of a laborious exercise than most companies envisioned at this time last year. And, this Deloitte memo says that Covid-19’s ongoing impact isn’t making things any easier. The memo discusses some “top of mind” financial reporting and accounting issues that companies are dealing with as challenges resulting from the pandemic continue to evolve. Here’s an excerpt addressing accounting considerations for companies that may be thinking about optimizing their real estate footprint:
In connection with optimizing their real estate footprint on a go-forward basis, a number of companies are reevaluating their leases or lease portfolios. From an accounting standpoint, companies should consider whether a decision to no longer use a leased asset constitutes an abandonment of the asset. Accounting guidance generally requires a company to accelerate expense recognition for assets deemed “abandoned.” However, to be deemed abandoned, a company needs to assess whether it has the ability and would be willing to sublease the leased asset at any point during the remaining lease term. This may include considering the economic environment and the expected demand in the sublease market and will likely require a company to use more judgment when assessing longer remaining lease terms. The potential that a company would be willing to sublease an asset at any point in the future may preclude the company from considering an asset to be abandoned and thus preclude the acceleration of expense recognition.
Some of the other topics addressed in the memo include forecasting, non-GAAP disclosures, internal controls, stock compensation plans and awards, default risk on modified loans, goodwill impairment and modification of other contractual agreements.
Following the killing of George Floyd, investors are increasingly calling for change and looking for company and board diversity data. A few weeks ago, I blogged about State Street’s request for companies to disclose board and workforce racial diversity data and last week, Liz blogged on our “Proxy Season Blog” about Neuberger Berman’s willingness to use its proxy votes to push for diversity disclosure. With all this recent news, some may have missed that last year, Vanguard spoke up on board diversity by detailing expectations about board diversity as part of its 2019 Investment Stewardship Report.
In that report, Vanguard explained that in addition to promoting board gender diversity, the asset manager is asking boards to seek greater diversity. Here’s an excerpt and Vanguard’s list of expectations for public companies:
We have long believed in the importance of diversity in the boardroom, and we have increasingly advocated for greater representation of women on corporate boards. We are expanding our focus to more explicitly urge boards to seek greater diversity across a wide range of personal characteristics, such as gender, race, ethnicity, national origin, and age. Our board diversity expectations of public companies includes:
(1) Publish your perspectives on board diversity. Here’s what we ask companies: Does your board share its policies or perspectives on diversity? How do you approach board evolution? What steps do you take to get the widest range of perspectives and avoid groupthink? Vanguard and other investors want to know.
(2) Disclose your board diversity measures. We want companies to disclose the diversity makeup of their boards on dimensions such as gender, age, race, ethnicity, and national origin, at least on an aggregate basis.
(3) Broaden your search for director candidates. We encourage boards to look beyond traditional candidate pools—those with CEO-level experience— and purposely consider candidates who bring diverse perspectives into the boardroom.
(4) Make progress on this front. Vanguard expects companies to make significant progress on boardroom diversity across multiple dimensions and to prioritize adding diverse voices to their boards in the next few years.
Board Composition: Snapshot of Ethnic & Gender Diversity Data
With increased attention on board composition, just last week Russell Reynolds issued an updated report on ethnic & gender diversity for U.S. public company boards and it says that Black representation on S&P 500 boards was surprisingly low in 2019 – only 6% of S&P 500 directors were Black. The report provides a snapshot of board ethnic and gender diversity data, including trends – helpful data to take a look at and have on hand, especially when directors ask about trends and benchmarks. Here’s a few high-level data points:
– Compared to data for S&P 500 directors, Fortune 100 and 500 boards had slightly higher percentages of Black directors – 11.1% and 8.6% respectively
– When looking at trend data, the report shows board gender diversity has improved significantly from 2010 to 2018 but over that same time span, there has been minimal movement in board ethnic diversity – for Fortune 500 companies, the percentage of women directors increased steadily from 16 to 23%, while the percentage of Black directors has hovered between 7 and 9%
– At the time of the report, there were 161 companies in the S&P 500 without any black directors and although that’s a high number, Russell Reynolds reports that compared to a mid-July 2020 study, that number has actually declined from 172 – a 6% improvement in just a couple of months
– Data from KPMG, Ascend and Pinnacle included in the report shows Asian director representation in the Fortune 100, 500 and 1000, the majority of which fail to include at least one Asian director – see this KPMG study about the prevalence of Asian directors on Fortune 1000 boards
$10 million Whistleblower Award!
Earlier this summer, John blogged about someone hitting the whistleblower jackpot and since then there have been several sizable awards. Now there’s another with the SEC issuing this press release announcing an award of more than $10 million, not quite as high as the earlier jackpot but it’s no small change – and it likely brightened the whistleblower’s day. Persistence has a way of paying off, here’s an excerpt from the SEC’s Order:
Claimant provided Enforcement staff with extensive and ongoing assistance during the course of the investigation, including identifying witnesses and helping staff understand complex fact patterns and issues related to the matters under investigation; the Commission used information Claimant provided to devise an investigative plan and to craft its initial document requests; and Claimant made persistent efforts to remedy the issues, while suffering hardships.
Ever since the SEC proposed amendments to increase the Form 13F reporting thresholds, there has been ongoing commentary voicing concerns – here’s John’s blog about some of the ‘hot’ comment letters. A recent MarketWatch opinion piece from Ethan Klingsberg and Elizabeth Bieber of Freshfields does a nice job explaining why, if adopted, the rules could ultimately make things more difficult for company directors – and we could add to that most everyone involved in shareholder engagement efforts.
The authors note how off-season shareholder engagement has evolved to become “de rigueur for public companies.” During proxy season, asset managers and governance specialists are swamped and pressed for time, which as many corporate secretaries have learned, has made off-season shareholder engagement a priority. As investors look to engage with companies and sometimes request executives and directors be part of those conversations, the authors acknowledge the development has been good for business. Even though there are still periodic activist campaigns, the authors note that a spectrum of shareholders are engaging in constructive dialogue with companies and then explain what could happen if the proposed amendments are adopted:
But all of these positive developments hinge on one factor: knowing who your shareholders are. Right now, mega-shareholders (those owning more than 5% of the outstanding stock) make mandatory filings, but for many companies, there are large numbers of institutional shareholders under this threshold that boards want to take into account and to which they want to organize outreach.
The way that these shareholders are identified is by the quarterly filings on Form 13F. The SEC has proposed to cut back the 13F filing requirement dramatically, with boards ceasing to have visibility on holdings by 4,500 institutional investment managers representing approximately $2.3 trillion in assets, according to one SEC commissioner. Only the most proactively vocal shareholders and the largest shareholders will be visible to boards.
Today in response to 13F filings, companies are able to proactively reach out to shareholders to help educate shareholders and understand their views. We should keep the board-shareholder dynamic healthy and constructive rather than impeding it by tearing down the 13F regime.
Comment Period on Shareholder Proposal Rules – Request to Re-Open It
With the SEC slated to consider amendments to the shareholder proposal rules on Wednesday and despite a deluge of comment letters, a coalition of shareholder rights advocates have requested the Commission re-open the comment period for the proposed rule amendments. The crux of the request to re-open the comment period relates to previously undisclosed data used to estimate the impact of the proposed amendments, here’s an excerpt from the group’s letter:
We are troubled by the 11th-hour submission by the Chief Economist of the Commission’s Division of Economic and Risk Analysis (“DERA”), on August 14, long after the February 3, 2020, public comment deadline, of the staff’s analysis of previously undisclosed data that is material to the public’s understanding of their predicted impact. The August 14 DERA Memo indicates that the Commission has been in possession of the data since at least August 2019 and that DERA staff had used the data to estimate the impact of the proposed amendments before the Commission voted to propose them. Yet the data and the staff’s analysis were held back from the Release accompanying the proposed amendments and not released until the Commission announced that it is prepared to vote on final changes to Rule 14a-8, without an opportunity for public comment.
The letter elaborates and asserts that the fact that the data was withheld is a significant breach of the Commission’s Current Staff Guidance on Economic Analysis in SEC Rulemaking, which among other things requires that the economic analysis that accompanies a proposed rule provide a fair assessment of the predicted impact of a proposed rule, including costs and benefits, as well as that it ‘clearly address contrary data or predictions.’
The SEC recently cancelled an open meeting when it was scheduled to consider adopting amendments to its whistleblower program. Even with periodic last-minute cancellation notices, with so much anticipation around the proposed amendments to the shareholder proposal rules, it would come as a bit of a surprise if Wednesday’s meeting was cancelled – we’ll see where this goes, stay tuned!
Tomorrow’s Webcast: “Non-GAAP Measures & Metrics: Where Are We Now?”
Tune in tomorrow for our webcast – “Non-GAAP Measures & Metrics: Where Are We Now?” – to hear Mark Kronforst of Ernst & Young, Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net and Lona Nallengara of Shearman & Sterling discuss non-GAAP disclosures that are back in the spotlight as companies grapple with how to quantify the effect of COVID-19 on their results of operations and the Corp Fin Staff continues its focus on individually tailored accounting principles and disclosure of key performance metrics.
Earlier this summer, I blogged about how Calvert called on companies and investors to take more tangible steps in addressing racial inequities. SSGA is also pushing for more change and yesterday, the asset manager posted a letter from its Global Chief Investment Officer specifying SSGA’s expectations for public companies relating to diversity, strategy, goals & disclosure. Many companies disclose some of this information and if companies haven’t starting thinking about disclosure on these issues, this call from SSGA, one of the largest asset managers, might be the nudge that starts the ball rolling.
Addressed to board chairs, the letter says ongoing issues of racial equity have led SSGA to focus on ways racial and ethnic diversity impacts the asset manager as an investor. The letter says that starting in 2021, SSGA is asking companies to disclose more information relating to diversity and it breaks this information into five key areas. SSGA plans to cover these topics in engagement conversations and the letter says engagement is SSGA’s primary tool to understand a company’s plan and how the board carries out its oversight role – but for companies that don’t meet the asset manager’s expectations, it says SSGA is prepared to use its proxy voting authority to hold companies accountable. Here are SSGA’s five key areas for which it’s asking for more diversity disclosure:
Strategy: Articulate what role diversity plays in the firm’s broader human capital management practices and long-term strategy
Goals: Describe what diversity goals exist, how these goals contribute to the firm’s overall strategy, and how these goals are managed and progressing
Metrics: Provide measures of the diversity of the firm’s global employee base and board, such as by disclosing EEO-1 data (or data based on that framework) and at the board level, by disclosing diversity characteristics, including the racial and ethnic make-up of the board
Board: Articulate goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company’s workforce, community, customers and other key stakeholders
Board Oversight: Describe how the board executes its oversight role in diversity and inclusion
SEC Approves NYSE “Direct Listings” Proposal!
It’s been a busy week and late Wednesday, the SEC issued an order giving the go ahead to the NYSE on its “Direct Listings” proposal. This will allow companies to sell newly issued primary shares on its own behalf into the opening trade and offers an alternative to the traditional underwritten IPO, providing a more cost-effective means to access capital. Some may recall the NYSE amended the proposal twice after the SEC initially rejected the proposal last December.
The SEC’s order states that “after careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.” Last November when the proposal was originally filed, some expressed concern about investor protection issues when not using the traditional IPO process, but the SEC’s order includes discussion rejecting that concern.
For those wondering about Nasdaq, Reuters reported that Nasdaq filed a similar proposal with the SEC earlier in the week. To help members stay up to date on these developments, we’ll be posting memos in our “Direct Listings” Practice Area.
SEC’s Filing Fees: Going Down Nearly 16% on October 1st!
Earlier this week, the SEC issued this fee advisory that sets the filing fees for registration statements for 2021. Right now, the filing fee rate for Securities Act registration statements is $129.80 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, the rate will decrease to $109.10 per million, a 15.9% decrease.
Last year, the rates went up a little over 7% so it’s nice to see the rates turn the other direction. As noted in the SEC’s order, the new fees will go into effect on October 1st as mandated by Dodd-Frank – which is a departure from back in the day when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.