If you are looking for other reasons to become a member of PracticalESG.com, I note from Zach Barlow’s post on the PracticalESG.com blog that the site’s newest feature is now live – a Glossary of the ever-growing collection of acronyms, terms and abbreviations that make up the ESG, climate, sustainability and DEI landscape. This is an essential resources for everyone who works in areas that touch on these topics. You can become a member of PracticalESG.com today by clicking here, emailing sales@ccrcorp.com or by calling (800) 737-1271.
I have to admit, after having spent almost three decades now either regulating or advising on the preparation of issuer disclosure, I sometimes wonder, is it really serving any purpose? For example, it always troubles me that when I receive a prospectus or proxy statement in the mail, I never actually have time to review it, because I am too busy helping issuers with their prospectuses and proxy statements! Well, my self-doubt was assuaged last week in a speech by Chair Gensler before the 11th Annual Conference on Financial Market Regulation, where he extolled, among other things, the benefits of issuer disclosure on the financial markets. After describing the Commission’s efforts toward making issuer disclosure easily accessible to the public through the EDGAR system, Chair Gensler concluded:
Adam Smith’s nearly 250-year-old notion—that the whole economy benefits when the price of information is lowered, or information is free—is as relevant today as it has ever been. The SEC, as mandated by Congress, has an important role to promote data as a public good.
I’m proud to work with all of my colleagues at the SEC, including those of you from DERA, to ensure for the public good of data.
With Chair Gensler’s encouragement, I can now go about my day promoting data as a public good!
We are now just a little over two weeks away from the new T+1 settlement timeframe, which will be implemented over the Memorial Day holiday weekend across securities markets in the U.S. What seemed like a distant to-do list item the last time I blogged about the move to T+1 is now very much a reality. Here are few last-minute considerations for you as we hurtle toward this more rapid settlement cycle:
1. If you have a contemplated capital markets transaction over the course of the next few weeks, it will be important to adjust the timeline for when you will conduct diligence calls, obtain signed documents and make filings with the SEC. For example, deal teams will need to prepare for a much quicker timetable for filing a prospectus or prospectus supplement in a T+1 settlement cycle, even though SEC rules permit filing on the second or fourth day after first use of a prospectus or prospectus supplement.
2. If you have a selling securityholder transaction that will settle after the T+1 settlement cycle goes into effect, keep in mind all of the documents and actions that will be required in anticipation of settlement, including such things as medallion guarantees, delivery of “wet ink” signatures and “know your customer” or “customer due diligence” documentation and delivery of delegending and local counsel opinions. Now is the time to plan for these matters given the impending compressed settlement timeframe.
3. For issuers with active “at-the-market” or “ATM” offerings, note that, after the Memorial Day weekend, ATM sales will settle on a T+1 basis, so now is a good time to modify your procedures and timelines around ATM sales to accommodate the faster settlement cycle.
4. Beginning on May 29, 2024, the ex-dividend and ex-rights dates for dividend payments and rights distributions will be the same date as the record date for the relevant dividend or distribution. During the transition, ex-dividend dates will be as follows: (i) if the Record Date is May 24, the Ex-Dividend Date will be May 23; (ii) if the Record Date is May 28, the Ex-Dividend Date is May 24; and (iii) if the Record Date is May 29, the Ex-Dividend Date is May 29.
5. If you are contemplating a global securities offerings, note that markets outside North America will remain on their current settlement cycle, potentially resulting in conflicting timelines for documentation and funds flow. These issues may be particularly acute when dealing with markets in Asia due to time zone issues.
With just two weeks to go, now is the time to act! This is one of those times when pulling out the last deal’s timeline and documents just won’t cut it, you will need to dig deep to anticipate all of the potential consequences of a faster settlement, while managing your client’s expectations.
It boggles my mind that, almost fourteen years after the Dodd-Frank Act was enacted, we still have unfinished rulemaking directives from that legislation. For those of you who may not have been practicing fourteen years ago, the enactment of Dodd-Frank was a big deal, because at the time we were still very much hurting from an extraordinary financial crisis for which there had been little accountability. Unfortunately, instead of accountability, we got some real gems of new disclosure rules out of the Dodd-Frank Act, such as pay versus performance, CEO pay ratio, conflict minerals and resource extraction payments. But one piece of Dodd-Frank actually sought accountability through rigid limitations on incentive compensation at financial institutions, and that is the rulemaking that remains unfinished to this day.
As Meredith noted last week on The Advisors’ Blog on CompensationStandards.com, some of the financial institutions tasked with writing the incentive compensation rules recently took action to re-propose the rules, which were last proposed in June 2016. Last week, the FDIC, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency adopted a Notice of Proposed Rulemaking to address incentive-based compensation arrangements, as required under Section 956 of the Dodd-Frank Act. The National Credit Union Administration is expected to take action on the proposed rules in the near future, and the SEC has included a rulemaking to implement Section 956 on its rulemaking agenda. The Board of Governors of the Federal Reserve did not join the joint proposal of the banking regulators, with Chair Powell recently testifying: “I would like to understand the problem we’re solving, and then I would like to see a proposal that addresses that problem.”
As this Sullivan & Cromwell memo notes, the proposed rules is consistent with the 2016 proposed rule and includes the following key provisions:
– Approach to Proportionality. Covered institutions are categorized into three tiers based on average total consolidated assets, with increasingly stringent requirements applying to institutions with over $1 billion, $50 billion and $250 billion in assets (Level 3, Level 2 and Level 1 covered institutions, respectively).
– Defining Covered Persons. Additional, more stringent rules apply to incentive-based compensation paid to “senior executive officers” and “significant risk-takers” at Level 1 and Level 2 covered institutions. The proposed rule provides a list of roles that would be classified as senior executive officers and identifies significant risk-takers based on relative compensation levels or ability to commit or expose 0.5% of the covered institution’s capital.
– Limits on Incentive Opportunity & Structures. At Level 1 and Level 2 covered institutions, the maximum earned incentive for senior executive officers is limited to 125% of the target amount, and for significant risk-takers is limited to 150% of target. (There are no fixed limits on the absolute size of potential targets.) General requirements for performance determinations would apply to all covered institutions, and Level 1 and Level 2 covered institutions would face prohibitions on the use of relative or volume-driven performance measures in isolation.
– Mandatory Deferral Requirements. The proposed rule introduces longer deferral periods (up to four years after the end of the performance period) and higher minimum deferral amounts (up to 60%) for incentive-based compensation depending on whether the covered institution is Level 1 or Level 2 and whether the individual is a senior executive officer or significant risk-taker. Deferred incentive-based compensation generally may not vest faster than on a pro rata annual basis beginning on the first anniversary of the end of the performance period and must include a “substantial portion” of both equity-like instruments and deferred cash.
– Putting and Keeping Pay at Risk. All incentive-based compensation for senior executive officers and significant risk-takers at Level 1 and Level 2 covered institutions must be subject to downward adjustment, forfeiture and clawback. The proposed rule includes a list of triggering events that require a downward adjustment and forfeiture review at Level 1 and Level 2 covered institutions. In addition, it would subject incentive pay to clawback for seven years after compensation vests.
– Governance, Risk Management and Recordkeeping Requirements. New requirements would apply to board of director and compensation committee oversight and approvals. Covered institutions would be subject to annual recordkeeping and seven-year retention requirements, with records disclosed to the appropriate Agency on request. The proposed rule also contains specific risk management and control requirements.
In my view, Section 956 of the Dodd-Frank Act was flawed from the start, making this rulemaking effort particularly challenging for the financial regulators. The reactionary approach taken by Congress in Section 956 was perhaps somewhat understandable in the wake of the financial crisis, but now seems overboard given that we are over a decade and a half removed from that particular situation. Unfortunately, the financial institutions regulators are stuck with the statutory directive, making it difficult for them to adopt rules that are more reflective of where we stand today.
The SEC’s notable absence from the joint agency action on Section 956 of Dodd-Frank Act inevitably makes one wonder, where are we on SEC rulemaking? It will probably be another month or so before we see the updated Spring Reg Flex Agenda, but the overall timing now makes things interesting as we enter the throes of a Presidential election cycle. Conventional wisdom used to be that the SEC, like other government agencies, would slow down or stop its rulemaking activity as we enter the summer before a Presidential election. This approach made sense for a variety of reasons, given that agencies would not want to have controversial proposals interfere with election year politics, and agencies generally wanted to avoid going to all of the trouble of writing a rule only to have it invalidated under the Congressional Review Act, should the political winds shift against the party in power.
Unfortunately, nothing approaching “conventional” or having to do with “wisdom” prevails in the political state as we know it today, so we have the most recent example of the last six months of the Trump Administration, when the SEC was furiously adopting rules into late December, even after the political winds had in fact shifted and the outcome of the election was known (at least to some), which seemed quite odd. Given that precedent, it is certainly possible that we could see the same scenario play out again in terms of the SEC continuing to propose and adopt rules through the remainder of this year. Remaining out there on the rulemaking agenda are some other controversial items, such as revisiting the definition of “held of record” (and thereby forcing unicorns to register under the Exchange Act) and revisiting Regulation D to address reliance on that exemption from registration by large private issuers. Only time will tell whether these proposals see the light of day.
According to a new report issued by the Shareholder Rights Group, the Staff is seeing a lot more no-action letter requests on shareholder proposals this year, and is permitting companies to exclude a significantly higher percentage of those proposals than they did last year:
Evaluation of SEC staff no action decisions on shareholder proposals from November 1, 2023 to May 1, 2024 demonstrates that the SEC has supported company requests for exclusion of proposals roughly 68% of the time. Companies sharply increased the number of requests filed with the SEC during the same period, with these two developments combining to produce a surge of exclusions.
At this time last year, the Staff permitted exclusion of 56% of the proposals for which no-action relief was sought. The report says that so far this year, the Staff has issued 259 decisions on no-action letters compared to 167 last year and has granted no-action requests for 139 proposals, compared to 76 last year. The report says that numerous climate-related proposals have been excluded in situations where companies argued they involved micromanagement, and that social-related proposals have been bounced on similar grounds.
Last week, Meredith blogged about the inevitable challenge to the FTC’s non-compete ban filed by the US Chamber of Commerce. Given the SEC’s recent experience in the federal courts, I think many of us are inclined to believe that a court will ultimately strike down or pare back the FTC’s ban. But University of Chicago Law School professors Jonathan Masur & Eric Posner say that the ban is legal, and it’s not a close call. Here’s an excerpt from their recent post on the ProMarket Blog:
The FTC’s statutory authority to issue the noncompete rule is not an edge case. Section 5 of the FTC Act of 1914 authorizes the FTC to prevent firms from engaging in “unfair methods of competition.” Congress used this phrase, which was novel at the time and deliberately broad, to encompass anticompetitive behavior that was both already covered by the antitrust laws (which prohibited firms from using “restraints of trade” and from “monopoliz[ing]” markets) as then interpreted by the courts and that reached beyond them.
Like countless other regulatory agencies before and since, the FTC was entrusted with authority to interpret the law, effectively to make policy within the law’s ambit. As a noncompete is just a restraint of trade that restricts competition, the statute plainly authorizes the FTC to issue a rule regulating noncompetes.
While the authors acknowledge that the FTC has typically used case-by-case adjudication to make policy instead of rulemaking, it’s clear that Congress also gave the agency the authority to “make rules and regulations for the purpose of carrying out the provisions of” the FTC Act in section 6(g).
This Morgan Lewis memo provides a heads up about amendments to NYSE Rule 123D that address trading halts around reverse stock splits that will go into effect on Saturday, May 11th. The amendments are being implemented to harmonize the NYSE’s rules with those of Nasdaq. This excerpt from the memo describes the amendments:
The NYSE Amendments add new subparagraph (f) to Rule 123D, which provides that the NYSE will halt trading in a security for which the NYSE is the Primary Listing Market before the end of post-market trading on other markets on the day immediately before the market effective date of a reverse stock split. Such a trading halt due to a reverse stock split will be mandatory.
In connection with a reverse stock split, the NYSE has stated that it expects to initiate the halt at 7:50 pm EST, prior to the end of post-market trading on other markets at 8:00 pm EST, on the day immediately before the market effective date of the reverse stock split. Trading in the security will resume with a Trading Halt Auction starting at 9:30 am EST on the market effective date of the reverse stock split.
The memo says that the rule change was prompted by market participants’ concerns that allowing trading on an adjusted basis during early morning trading sessions could result in system errors or problems going unnoticed for a period of time when a security that has undergone a reverse stock split opens for trading with other thousands of securities.
The SEC continues to make headlines & honk off crypto bros by targeting industry participants for investigations and enforcement actions. Now, it turns out that the regulatory crypto crackdown may be an issue in this year’s election, at least according to a recent Harris survey of swing state voters. The poll, which was commissioned by the Digital Currency Group, surveyed 1,201 registered voters in Arizona, Michigan, Montana, Nevada, Ohio, and Pennsylvania and found that more than 1-in-5 battleground state voters consider crypto to be a key issue. Here are some of the survey’s other key findings:
– Current crypto ownership among voters is relatively low (14%), and most do not feel knowledgeable about crypto (69%). About one-fifth of voters plan to own crypto in the next six months.
– Nonetheless, nearly a third of voters have positive feelings towards crypto (Crypto-Positive). This bloc of Crypto-Positive voters is consistently more enthusiastic about crypto than voters overall; most associate crypto with positive traits like innovative (62%), promising (50%), and accessible (45%).
– Most voters do not trust elected officials to understand innovative technology like crypto, and more than half are concerned about policymakers stifling innovation via overregulation. The vast majority want policymakers to be sure they understand crypto before regulating.
– Nearly half of voters do not trust political candidates that would interfere with crypto. One-quarter say that enthusiasm towards crypto would make them trust a political candidate more. 30% would be more likely to support a political candidate that is friendly to crypto.
– Of note, crypto regulation does have broad support –the majority of voters overall and nearly half of Crypto-Positive voters are in favor of an overhaul of crypto. Similarly, about 20-25% of voters and one-third of Crypto-Positive voters want elected officials to focus on crypto regulation or protections for crypto investors.
The survey also found that Crypto-Positive voters were more likely than other voters to be young, male, and African American or Hispanic. They were less likely to have a four-year college degree than voters overall but did not show any major differences on household income and political party lean. Finally, the survey found that Ohio voters were more negative toward crypto than voters in other swing states – so hey, I feel seen.
Yesterday, the PCAOB announced that it will hold an open meeting on Monday, May 13th to consider adopting a new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit. The new auditing standard would consolidate and reorganize several existing standards, and when the PCAOB announced the proposal last year, it said that AS 1000 was intended ‘to streamline and clarify general principles and responsibilities of auditors and provide a more logical presentation, which would enhance the useability of the standards by making them easier to read, understand, and apply.”
On “The Audit Blog”, Dan Goelzer said that there was a lot more to AS 1000 than just housekeeping:
The basic idea of updating and consolidating the foundational standards is sound. Technology, audit practice, and the standards of other audit regulators have all evolved since the PCAOB adopted the existing standards, on an “interim basis,” in 2003. Twenty years down the road, it makes sense to revisit the foundational standards, and the Board deserves credit for doing so.
But, in presenting this initiative as in essence a matter of housekeeping, the PCAOB may be seriously understating its potential impact. The proposal is not merely a repackaging of existing principles. Some aspects would seem to involve changes to the auditor’s responsibilities that would be more fundamental than the release recognizes and could have far-reaching consequences.
Those concerns were echoed by industry commenters on the proposal. Here’s an excerpt from a CAQ publication summarizing the key themes raised by accounting firms in comment letters to the PCAOB:
– The proposal expands the auditor’s responsibilities despite the Board’s statement that the amendments were clarifications of existing standards.
– The proposal eliminates key concepts and principles from the extant standards
– The proposal creates confusion about the auditor’s role and will have other unintended consequences
– Accounting firms and related groups, among other commenters, oppose the clarification of the meaning of fair presentation and state it is important that the auditor’s evaluation of the presentation of the financial statements be applied within the applicable financial reporting framework.
Despite the heartburn the proposed changes are causing to the accounting profession, the CAQ acknowledged that the handful of investors who submitted comments were generally supportive of them.
