Last week, the SEC joined several other financial regulators to propose joint data standards under the Financial Data Transparency Act of 2022. In its announcement of the rulemaking, the SEC notes that eight other financial regulators have proposed or are expected to propose the joint standards: the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Consumer Financial Protection Bureau, the Department of the Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency. The announcement goes on to note:
The proposed joint standards would promote interoperability of financial regulatory data across the agencies by establishing common identifiers for entities, geographic locations, dates, and certain products and currencies.
“This proposal will make financial data more accessible, uniform, and useful to the public,” said SEC Chair Gary Gensler. “Consistent data standards will make it easier for financial institutions to file reports across multiple agencies. They also will help regulators be more effective and efficient in carrying out our oversight functions.”
In addition, the proposal would establish a principles-based joint standard with respect to data transmission and schema and taxonomy formats, which would enable financial institutions to submit high-quality, machine-readable data to the agencies.
Comments on this rulemaking are due 60 days following publication of the proposing release in the Federal Register.
I am really looking forward to hosting the “Game Show Lightning Round: All Star Feud” segment at the 2024 Proxy Disclosure Conference, it will be fun! In order to make this game show a success, we need your participation! I won’t be able to say “Survey Says!” unless you actually participate in our survey. Please take a moment to respond to the latest anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you will have to join day 1 of our Conferences to hear whether your response made the “most popular” list.
If you have not done so already, today is a great day to sign up for our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences,” which are taking place on October 14th & 15th in San Francisco. There is also a virtual option if you are unable to attend in person. You can register by visiting our online store or by calling us at 800-737-1271.
John noted back in March that the Deputy Attorney General Lisa Monaco had announced a new pilot whistleblower program that provides corporate whistleblowers with financial awards. The pilot program has now been launched by the DOJ’s Criminal Division. The announcement of the launch of the pilot program notes:
The Department of Justice’s Criminal Division has launched a Corporate Whistleblower Awards Pilot Program to uncover and prosecute corporate crime. Under this pilot program, a whistleblower who provides the Criminal Division with original and truthful information about corporate misconduct that results in a successful forfeiture may be eligible for an award.
As described in more detail in the program guidance, the information must relate to one of the following areas: (1) certain crimes involving financial institutions, from traditional banks to cryptocurrency businesses; (2) foreign corruption involving misconduct by companies; (3) domestic corruption involving misconduct by companies; or (4) health care fraud schemes involving private insurance plans.
If the information a whistleblower submits results in a successful prosecution that includes criminal or civil forfeiture, the whistleblower may be eligible to receive an award of a percentage of the forfeited assets, depending on considerations set out in the program guidance. If you have information to report, please fill out the intake form below and submit your information via CorporateWhistleblower@usdoj.gov. Submissions are confidential to the fullest extent of the law.
Companies that voluntarily self-report within 120 days of receiving an internal whistleblower report may be eligible for a presumption of a declination under the Criminal Division’s Corporate Enforcement and Voluntary Self-Disclosure Policy if the company reports to the Department before the Department contacts the company.
The DOJ provides detailed guidance about the program, a fact sheet and an intake form. The announcement notes that a claim form will be available soon.
The announcement of a new DOJ pilot program for whistleblower awards, combined with the continued effectiveness of the SEC’s whistleblower program (a few weeks ago the SEC announced a $37 million award to a whistleblower) leads one to the inevitable question, what should companies do now in light of these developments?
I think it is a good time to take a close look at your company’s whistleblower program and processes to carefully assess whether it provides potential whistleblowers with a fair and effective process for receiving and acting on complaints, so that whistleblowers feel comfortable raising their issues internally rather than running straight to the government. While it should always be clear that an employee can go to the government with their concerns, one would hope that employees only see that option as a last resort. By having an effective internal process that ensures anonymity and prompt and appropriate follow-up (combined with an appropriate tone-at-the-top), a company can create a reporting culture that encourages an internal dialogue.
I encourage you to check out all of the great resources that we have posted in our “Whistleblowers” Practice Area. If you do not have access to all of the useful resources that we have in our Practice Areas, become a member of TheCorporateCounsel.net today by visiting our online store.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. The issue includes the following article:
– Time Is Up for Resource Extraction Issuers: Our Last-Minute FAQs
As I mentioned a few weeks ago, the SEC’s resource extraction issuer disclosure requirements require Form SD filings by September 26 for calendar year-end companies that are subject to these new requirements. Here are a few of the FAQs from the latest issue of The Corporate Counsel:
Will the SEC revisit the latest resource extraction issuer payment disclosure requirements?
In the time since the SEC adopted the latest rule and form amendments requiring the disclosure of payments by resource extraction issuers, an item has been included in the Regulatory Flexibility Act Agenda which references the resource extraction issuer disclosure rules. The more detailed description of the line-item states: “The Division is considering recommending that the Commission review the rules under section 1504 of the Dodd-Frank Act to determine if additional amendments might be appropriate.” In the Spring 2024 Reg Flex Agenda, the action is categorized in the proposed rule stage and projects a date for the proposal of April 2025, well after the date when Form SD filings are first required. At this point, all hope is lost that any changes will be made or a delay in the deadline will be adopted prior to the September 2024 Form SD filing deadline for calendar year-end companies.
When is the first Form SD required to be filed?
In the 2020 rulemaking, the SEC adopted a two-year transition period which specified that a resource extraction issuer will be required to comply with Rule 13q-1 and Form SD for fiscal years ending no earlier than two years after the effective date of the final rules. The final rules became effective on March 16, 2021, with initial Form SD filings due no later than 270 calendar days after the end of an issuer’s next completed fiscal year. Therefore, the deadline for companies with a fiscal year ended December 31, 2023 is September 26, 2024. While the example provided in the Adopting Release specifically referred to September 30, 2024 as the initial due date for a company with a fiscal year-end of December 31, 2023, the September 26, 2024 date is the actual due date for the Form SD under the transition provisions.
There is nothing in the rule that would facilitate combining the Form SD for conflict minerals disclosure with the Form SD for payments made by resource extraction issuers, given that they have different filing deadlines (the Form SD for conflict minerals disclosure is due on May 31 for the prior calendar year).
What happens if the Form SD is not timely filed?
The failure to timely file a Form SD pursuant to Exchange Act Section 13(q) does not cause a company to lose its eligibility to utilize Form S-3. As noted in Question 115.04 of the Securities Act Forms CDIs, in determining eligibility for use of Form S-3, the requirement that the company has filed in a timely manner all reports and materials required to be filed during the prior 12 calendar months refers only to Exchange Act Section 13(a) or 15(d) reports and Exchange Act Section 14(a) and 14(c) materials. Further, a report that is deemed to be “furnished” and not “filed” does not impact a company’s Form S-3 eligibility, as noted in Securities Act Forms CDI Question 115.07. As noted above, a Form SD disclosing payments made by resource extraction issuers is required to be furnished under Exchange Act Section 13(q), therefore the failure to timely file does not impact a company’s Form S-3 eligibility. It is conceivable, although perhaps unlikely, that the SEC could bring an enforcement action against a company for a failure to file a Form SD under Section 13(q). It is also possible that the Staff of the Division of Corporation Finance could utilize the comment process to ask a company why it has not filed a Form SD to disclose payments by resource extraction issuers.
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The extraordinary developments with generative AI over the past year and a half have created challenges for all types of companies, as they seek to have their public disclosures keep up with the pace of change and avoid regulatory scrutiny. This recent Alston & Bird alert does a nice job of surveying those disclosure challenges and describing the SEC filing, SEC Enforcement and shareholder litigation trends. The alert notes:
While the SEC’s focus on AI disclosures will likely encourage an increasing number of companies to disclose AI-related risks, issuers have already started incorporating relevant risk disclosures into their annual Form 10-K filings, with over 40% of S&P 500 companies including such disclosures in their 2023 Forms 10-K and mentions of AI during earnings calls rising by 77% (subscription req’d) in the fourth quarter of 2023.
Additionally, our qualitative analysis of AI-related risk disclosures in fiscal year 2023 Forms 10-K issued by Fortune 100 companies reveals several notable emerging trends. For example, we found that 46% of Fortune 100 companies included AI-related risk disclosures in their Forms 10-K and that such disclosures fall broadly into five buckets: (1) cybersecurity risk; (2) regulatory risk; (3) ethical and reputational risk; (4) operational risk; and (5) competition risk. These risk disclosures were not limited to a certain industry or sector, with a broad range of public companies making risk disclosures that fall into one or more of these buckets.
The SEC’s two recent enforcement actions involving AI are summarized, and the alert notes that, in recent years, private securities litigation has targeted issuers with AI-related claims. The alert ends with these key takeaways for public companies:
Although AI-related disclosures have become a new target in securities enforcement and litigation, companies and their counsel can take proactive steps to protect against future liability.
– Companies should ensure that disclosure counsel understands how the business uses and plans to use AI, and that the business understands the importance of consulting with legal counsel before making public representations about the company’s use of AI.
– Companies should also be aware that even general “puffery” remarks about the company’s use of AI may be scrutinized by the SEC or private plaintiffs, particularly in the context of “AI washing.”
– Public companies should remain aware of continuing SEC guidance, even in the form of SEC remarks, about crafting AI-related disclosures and should consider those remarks when determining how to approach such disclosures.
– Companies should consider whether and how to educate their boards of directors regarding the company’s use of AI (as well as AI use by competitors, significant vendors, and large customers, as applicable) and the related risks and benefits of such use, including with respect to the company’s disclosure obligations.
– Companies should take a broad and deep view of the potential risks posed by AI technologies and consider whether and how to best disclose such risks.
– Financial firms in particular should ensure that their policies and procedures and record-keeping requirements comply with the latest SEC guidance.
As the SEC Staff noted earlier this year, this topic will continue to be a focus at the SEC, and companies should continue to monitor their disclosure obligations in this rapidly changing space.
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.
