I must admit, I have not dipped my toes into the generative AI waters yet. I like to tell myself that I am not some sort of Luddite who is opposed to embracing new technologies, but in reality there are some Luddite tendencies at work. Perhaps the thing I fear the most is that somehow generative AI will replace what I both love and hate most about my job: staring at a blank Word document on my computer and trying to come up with something interesting to say to fill the space. And then there is the part about the generative AI robots coming for my job itself, but I remain hopeful that is not imminent.
As everyone tries to figure out how best to deploy generative AI in their work lives, we now have some helpful guidance from the Standing Committee on Ethics and Professional Responsibility of the American Bar Association, which recently published Formal Opinion 512, providing guidance on the ethical use of generative AI tools by legal professionals. This Debevoise & Plimpton blog notes:
On July 29, 2024, the Standing Committee on Ethics and Professional Responsibility of the American Bar Association (“ABA”) published Formal Opinion 512, providing guidance on the ethical use of generative AI tools by legal professionals (the “Opinion”). The Opinion is the latest of several similar ethical guidelines published by various state courts and bar ethics committees, including the September 2023 guidance from the Committee on Professional Responsibility and Conduct for the State Bar of California (“COPRAC”), the January 2024 Florida Bar Ethics Opinion 24-1, the January 2024 New Jersey Supreme Court Notice to the Bar, and the April 2024 Report and Recommendation of the New York State Bar Association Task Force on Artificial Intelligence. We have previously written about the COPRAC guidance and key takeaways for professional firms’ use of AI. To date, no state courts, bar ethics committees, or other advisory bodies on legal practice have chosen to amend or create new ethical rules for generative AI—instead, all such bodies have chosen to extend existing rules to use of this new technology.
Although the Opinion is intended to assist lawyers with upholding their ethical and professional responsibility obligations when using generative AI in legal practice, the guidance is also instructive for the responsible use of generative AI outside of the legal profession.
The Opinion addresses six different ethical considerations outlined in the ABA Model Rules of Professional Conduct, including competence, confidentiality, communication, candor, supervisory responsibilities and fees. This Opinion is definitely a must read for any legal professional who is using generative AI in their daily practice.
Side Note: As you might have guessed, the image used in the Debevoise & Plimpton blog is the stuff of my nightmares!
While one can easily envision a dystopian world in the not-to-distant future where generative AI robots provide us with our continuing legal education, at the moment we should celebrate the fact that we are hosting old-fashioned, in-person Conferences coming up on October 14th & 15th in San Francisco. The panels at our Conferences will be staffed with real-live people, and you definitely will not want to miss what they have to say!
If you can’t make it to the Conferences in person, we also offer a virtual option. Ask your AI assistant to register you today by visiting our online store or by calling us at 800-737-1271.
There is a good reason everyone hates Mondays. Sometimes, bad stuff happens on Mondays, and yesterday was just one of those days. Yesterday, the S&P 500 index fell 3%, the Dow Jones Industrial Average fell 1,034 points and the Nasdaq dropped 3.4%. Disturbingly, the Nikkei Stock Average in Japan suffered its worst one-day drop since the crash after 1987’s infamous Black Monday. It was as if everyone showed up on Monday and collectively decided that things were not looking as rosy on Monday as they had been on Friday. I was completely oblivious to the market tumult, driving for 12 hours from Southeast Georgia to get out of the path of Hurricane Debby. It was jarring to look at my phone late in the day and see the news of the Wall Street rout that seemingly came out of the blue. At least things were looking more positive as of early this morning. Maybe it was just a Monday thing.
One thing that has always fascinated me about financial markets is the inevitable rhythm of the markets over time. For example, anyone who has practiced in capital markets generally knows that you do not want to price an IPO in the last few weeks of August, because traders and investors tend to go on vacation and market trading thins out. The same concepts apply around holidays like Thanksgiving and Christmas, as the human elements of the markets are revealed to a certain extent. Over the years, I have noted how this conventional wisdom has faded to some extent, as markets have become more global and people tend to work from anywhere. Ultimately, these rhythms may be rendered completely obsolete when the AI robots take over trading and investment banking, and perhaps we will be better off without the all too human element of the markets. Until that time, we are still subject to the risk that all of those humans driving the markets will come into work on any given Monday and decide to sell, sending the indices plummeting. And then, the next day, because it is a Tuesday, deciding that maybe things were not so bad after all.
Last week, Corp Fin posted three new CDIs related to asset-backed securities. This Mayer Brown alert notes:
C&DI 103.01 SECURITIZATION PARTICIPANT – INFORMATION PUBLICLY AVAILABLE ON EDGAR
This C&DI provides guidance on when affiliates and subsidiaries may be considered “securitization participants” under Rule 192. Here, staff confirms that merely having access to, or receiving, information that is publicly available on EDGAR, by itself, does not result in the affiliate or subsidiary being a securitization participant under paragraph (ii)(B) of the “securitization participant” definition in Rule 192(c). This is consistent with prior public statements made by SEC staff. For more insight into Rule 192, please see Conflict Resolution: The SEC Adopts Final Rule 192 (Conflicts of Interest in Securitization Transactions).
C&DI 112.01 FORM ELIGIBILITY FOR PUBLIC UTILITY SECURITIZATIONS
This C&DI provides guidance on the proper registration statement forms for offering of securities that are backed by securitization property which includes the right to assess and collect certain special charges on customers’ public utility bills (“public utility securitizations”). Here, staff confirms that (1) Form SF-1 is the proper registration statement form and (2) Form 10-K, Form 8-K, and Form 10-D are the appropriate forms for periodic reporting for public utility securitizations regardless of whether they are structured as stand-alone trusts or “series trusts” (where multiple series of unrelated securities are issued by a single issuing entity). Staff also states that, because public utility securitizations structured as series trusts are Exchange Act ABS, series trust issuers should refrain from making statements in their filings that they are not asset-backed issuers or that their securities are not asset-backed securities, as such statements would not be accurate.
C&DI 301.04 ITEM 1101(C) – SINGLE ASSET SECURITIZATIONS
This C&DI provides guidance that a security that is supported by the cash flow of a single asset satisfies the requirement in Item 1101(c)(1) of Regulation AB that an asset-backed security be primarily serviced by the cash flows of a discrete “pool” of receivables or other financial assets. Staff notes that the term “pool” in Item 1101(c)(1) of Regulation AB does not require more than one asset and instead refers to the general absence of active pool management. Issuers should note that this C&DI does not change the requirements of other rules and regulations, such as Rule 140 or Rule 190 under the Securities Act of 1933, or the disclosure requirements of Regulation AB, including, for example, Item 1112 (Significant obligors of pool assets).
I have not spent much time working with asset-backed securities in private practice, but I was in the Corp Fin office that handled asset-backed securities back in the 1990s, and I really enjoyed the “square peg, round hole” aspect of how we used the comment process and interpretations to create the disclosure regime for asset-backed securities in the time before Regulation AB was adopted as the comprehensive regulation framework for asset-backed securities offerings. I can distinctly remember being handed a stack of comments that we typically issued on asset-backed offerings and sent off to review a registration statement. There is nothing quite like learning by doing! In any event, we have certainly come a long way in the SEC’s approach to the unique aspects of this market.
As Meredith recently noted in The Proxy Season Blog, ISS recently announced an “updated and enhanced” version of its Cyber Risk Score. The announcement notes that the new version of the Cyber Risk Score “takes advantage of a richer collection of cyber incident exemplar data” so that “organizations that score 300 are 32 times more likely to suffer a significant breach incident over the subsequent twelve-month period than organizations scoring 850.” The announcement highlights these newly added metrics:
A newly added Cyber Risk Decile metric provides further insight into relative risk, as measured by the score, in the context of industry-relevant peer groupings. Additionally, new Component Scores describe the relative impact of underlying technical measurements on the ISS Cyber Risk Score for any given firm across five different categories of risk exposure, including Internet Presence, Infrastructure, Software Services, Endpoint Security, and Website Construction. … The score is packaged with other details and explanatory tools that help users interpret and action the score for multiple use-cases, including investment portfolio risk assessment, investment stewardship, and issuer engagement.
The Cyber Risk Score appears in ISS Benchmark Research and Voting reports of the S&P 600 and Russell 3000.
Last week, ISS launched its Annual Benchmark Policy Survey and development process, inviting companies, investors, corporate directors and other stakeholders to respond to a series of questions, then using those responses to inform the annual policy development process. In its release announcing the survey, ISS notes:
This year’s survey begins by seeking feedback on several topics specific to the U.S. market, including poison pills and executive compensation. The survey then moves on to elicit views with regard to EMEA markets. Questions cover general share issuances in France, virtual meetings and auditor rotation topics throughout Continental Europe, and cumulative voting for the election of directors in Middle Eastern and North African markets. Finally, the survey invites views on global environmental and social topics, specifically the disclosure of Scope 3 GHG emissions targets and workforce diversity.
More specifically, with respect to the US market, ISS asks a series of questions regarding the adoption of poison pills to inform its voting guidance, including;
– Is the adoption by a board of a short-term poison pill to defend against an activist campaign acceptable?
– Should pre-revenue or other early-stage companies be entitled to greater leeway than mature companies when it comes to the adoption of a short-term poison pill?
– Is it ever acceptable for a board to set the trigger of a short-term poison pill below 15 percent?
– Some companies have adopted a two-tier trigger threshold, with a higher trigger for passive investors (13G filers). Do you consider this to be a mitigating factor for a low trigger?
– How important is it that a poison pill include a “qualifying offer clause”, giving shareholders the ability to bypass the pill in the event of an offer that is deemed beneficial?
On the topic of executive compensation, ISS focuses its questions on, among other things, the relevance of the ratio of performance-based to time-based equity awards as a focal point of ISS’ qualitative review in the pay-for-performance analysis (given growing investor skepticism about performance equity practices), whether discretionary annual incentive programs are problematic and what approach ISS should take when compensation is tied to profits from managed funds.
The Annual Benchmark Policy Survey will close at 5:00 pm Eastern time on September 5, 2024.
Glass Lewis recently launched its own annual policy survey process to gather input for developing 2025 proxy voting guidelines. Glass Lewis first launched its annual policy survey process last year, and is now continuing the practice as we go into the next proxy season. Glass Lewis accepts responses from all Glass Lewis clients and industry participants. In the announcement of its policy survey on its website, Glass Lewis notes:
Glass Lewis has always been committed to better understanding how investors and companies view corporate governance and ESG topics. To ensure we capture broad market feedback as a part of our annual policy-setting process, you are invited to participate in our 2024 Policy Survey.
Your views and feedback will inform our understanding of evolving market sentiment on key governance and stewardship topics, ensure our 2025 Benchmark Voting Policy Guidelines are comprehensive, and enable us to provide more meaningful analysis.
After processing the feedback, Glass Lewis will share a summary of the survey results first with clients and then make it available on our website. Soon thereafter, we will publish our 2025 Benchmark Voting Policy Guidelines. Please note we will not identify individuals or organizations participating in the survey when we publish the results.
The Glass Lewis survey is wide ranging, asking questions about related party transactions, the use and oversight of generative AI, the board’s oversight of cybersecurity risks, director expertise, several compensation topics, responses to investor dissent, shareholder rights issues, stewardship and engagement, and a variety of ESG matters
The survey is open until Friday, August 30 at 8:00 p.m. Eastern time.
You can catch up on all of the latest developments with the proxy advisory firms by attending our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences,” which are taking place on October 14th & 15th in San Francisco. For example, our “21st Annual Executive Compensation Conference” will feature a panel titled “Navigating ISS and Glass Lewis” with Ning Chiu from Davis Polk, Rachel Hedrick from ISS and Krishna Shah from Glass Lewis. Be sure to check out all of our great speakers and action-packed agenda!
If you can’t make it to the Conferences in person, we also offer a virtual option so you won’t miss out on the practical takeaways that our speakers will share. You can register now by visiting our online store or by calling us at 800-737-1271.
When Reg FD was adopted almost 25 years ago, its objective was to level the playing field among all investors and eliminate the problem of companies providing preferential access to material information to favored investors. A recent post on “The CLS Blue Sky Blog” says that Reg FD isn’t working very well when it comes to private investor meetings, and suggests that the only viable solution to the problem may be to ban those meetings:
The blog identifies three possible solutions to the preferential disclosure problem that have been suggested. The first, and most extreme, is an SEC ban on private meetings. The second involves reliance on updates to NIRI’s standards of practice & ethical standards that require companies to provide fair and equal access to all investors and that would essentially end private meetings. The third alternative involves enhanced efforts to ensure that MNPI is not shared during private meetings. It says that the results of a new study evaluating each of these alternatives suggest that a ban on private meetings may turn out to be the only solution that will prevent preferential disclosure:
Should the SEC prohibit private meetings altogether? Data from our study alone cannot conclusively answer this question. However, our results show that the current flexibility in Reg FD allows IROs to disclose different information to preferred investors, suggesting that Reg FD is not fully meeting its stated goals. Further, the SEC’s focus on materiality consideration does not appear to be an effective solution. When taken in conjunction with prior research that documents informational advantages from private meetings, our results suggest that regulators consider eliminating private meetings if they wish to eliminate preferential disclosure and truly create a level playing field as was initially intended with Reg FD.
The study’s authors suggest that one way to implement a ban on private meetings would be to require all investor meetings to be publicly webcast, which is a practice that some companies already follow.
On July 31, 2024, the requirement for large accelerated filers to submit filing fee data in Inline XBRL (iXBRL) format went into effect. Unfortunately, we’ve heard from some of our members that it’s been a bit of a bumpy ride for some filers. Here’s what one member had to say:
Just want to alert you that things did not go as smoothly as the SEC expected for the first day of mandated iXBRL tagging of filing fee data for Large Accelerated Filers. While many fee-bearing filings containing iXBRL tagging of filing fee data went through successfully, some were – and still are – inexplicably still stuck “in progress” and have neither been accepted NOR disseminated on the SEC’s public website. A software fix was supposed to be in place late yesterday but we know of filings still stuck in limbo.
We received this communication yesterday morning. There isn’t anything up on the SEC’s website about this issue, so hopefully it’s been ironed out by now – but please let us know if you’re continuing to experience problems.
By the way, before everybody panics, the new tagging requirement applies only to large accelerated filers for now. Other filers will be phased in beginning on July 31, 2025.
