I must admit, I have always loved Thanksgiving. I have so many fond memories of the holiday, like waking up early and smelling Thanksgiving dinner cooking, playing in piles of leaves with my friends as a kid, traveling around town on a crisp Thanksgiving morning to visit local friends, eating two Thanksgiving dinners at my parent’s house and my in-laws’ house (and then being overcome by a “food coma” on a couch somewhere), watching my son play football at Baltimore’s M&T Bank Stadium for his high school Turkey Bowl and watching my dearly departed pug try to steal the Thanksgiving turkey off the table, to name just a few. Thanksgiving is that unique American secular holiday steeped in tradition where, for the most part, we take a moment to stop and appreciate things for just a moment. I can recall only a handful of times where I had to attend to work matters on Thanksgiving, which is a testament to how important the holiday is to all of us.
This has been one heck of year, so getting some downtime to reflect is welcome. A couple weeks ago, I moderated a panel at PLI’s 55th Annual Institute on Securities Regulation titled “The Year in Review: What Just Happened?” During the panel, we delved into several key SEC developments over the course of the last year, as well as the topic of generative AI. That discussion got me thinking that we actually have a number of things to be thankful for tomorrow in the securities and governance world, and here are my top 5:
1. We made it through the first year of pay versus performance disclosure. This time last year, many people were freaking out about the daunting task of calculating and drafting the new pay versus performance disclosure that the SEC required in 2022, and it was indeed a painful process. But now most issuers have that first year under their belt and, with the benefit of some additional Staff interpretations and comments, they can either “rinse and repeat” or make some incremental improvements to the pay versus performance disclosure in upcoming proxy statements. Note that the Staff issued some new and revised Regulation S-K CDIs regarding pay versus performance disclosure yesterday! More on those to come.
2. We are almost at the clawback policy finish line. Next Friday is the deadline for companies to adopt a clawback policy that complies with exchange listing standards, thus bringing to an end over a dozen years of buildup as to what sort of Dodd-Frank Act clawback the SEC and the exchanges would require. Obviously, the SEC ended up deciding to go with the most extreme approach to implementing the Dodd-Frank Act directive, but at least it is over!
3. The share repurchase disclosure requirements are not as bad as they could have been. The share repurchase disclosure requirements that the SEC adopted this past summer did not end up being as bad as what the SEC had proposed, moving from a daily reporting scheme to the quarterly reporting of daily repurchase data. Admittedly, it is still going to be a lot of extra work for no perceivable benefit, but at least we did not end up with something akin to Section 16 reporting for share repurchases. Further, the clock is ticking for the SEC to address the Fifth Circuit’s decision finding fault with the share repurchase disclosure rules, and it remains to be seen how that will all play out.
4. At least we have some rules around cybersecurity disclosure. The SEC’s cybersecurity disclosure rules were pretty much inevitable, but at least we have some concrete rules to work with now rather than regulation by interpretive guidance and enforcement. Next month, the current reporting of material cybersecurity incidents kicks in, and in upcoming Form 10-Ks issuers will be providing the periodic disclosure about cybersecurity risk management, strategy and governance. If you want to utilize your holiday downtime to get a jump on the drafting of that disclosure, be sure to check out our July-August 2023 issue of The Corporate Executive.
5. We made it through another year without mandatory SEC climate disclosure. As originally contemplated in the proposing release for the climate disclosure rules, large accelerated filers would have been gearing up to provide the first phase of mandatory climate disclosure in their Form 10-Ks for 2023, including Scope 1 and 2 GHG emissions data and extensive narrative disclosure about climate risks and governance. As we all know, that did not end up happening, so we remain in a holding pattern as to when final rules will be adopted and what the compliance timetable will look like for those final rules.
As for me, I am going to enjoy the next few days of holiday downtime and I hope you can too. I wish you all a happy Thanksgiving!
The Staff’s CDIs just keep on coming, with a new batch released yesterday. The Staff delves into some highly technical topics in this latest round of new CDIs, addressing the inclusion of securities in the filing fee exhibit and hyperlinking to Inline XBRL exhibits. Here is what the Staff said:
Question: A well-known seasoned issuer registers securities on an automatic shelf registration statement and elects to defer payment of filing fees pursuant to Rule 456(b). The issuer subsequently files a prospectus supplement in connection with a pay-as-you-go deferred fee payment under Rules 456(b) and 457(r) that includes the required filing fee exhibit. Must the filing fee exhibit’s Table 1 list all the securities listed in the initial filing of the related registration statement or is Table 1 permitted to list only the securities being offered by the prospectus supplement as to which the fees are being paid?
Answer: Table 1 must include the securities for which a deferred fee is being paid in the “Fees to Be Paid” lines. The issuer does not need to repeat previously included rows reflecting the registration of classes of securities in an indeterminate amount in reliance on Rule 457(r) in either the “fees to be paid” or “fees previously paid” lines. In addition, the issuer need not include in the “fees previously paid” line securities for which the issuer previously paid a fee that are part of (i) the same offering as those for which the issuer is paying a deferred fee; or (ii) any prior offering. [Nov. 20, 2023]
Question: Item 601(a)(2) of Regulation S-K provides that an exhibit index does not need to include a hyperlink to an exhibit that is filed in XBRL. Does this exception apply to exhibits that are filed in Inline XBRL?
Answer: No. Item 601(a)(2)’s reference to exhibits filed in XBRL refers to exhibits that are filed in unconverted code, which is only machine-readable. See Release No. 33-10322 (Mar. 1, 2017). An exhibit that is tagged in Inline XBRL is not filed in unconverted code. [Nov. 20, 2023]
With respect to the second new CDI, an example of such an exhibit is the upcoming share repurchase exhibit, which will be required to be tagged using Inline XBRL.
Will we get more CDIs during this holiday week? Only time will tell.
The Corp Fin Staff’s CDIs are such an integral part of our practice today, but I realize that many practicing today may not really know where they came from. Well, come sit by the fire my friends and let your intrepid blogger tell you a little story about the birth of the CDIs.
Now, for the purpose of storytelling, our main character in this tale is yours truly, but in fact many, many folks from the Corp Fin Staff contributed to the birth of the CDIs. If you have been following my work for some time, you have no doubt gleaned that one of my credos is “share the knowledge,” and I developed that sensibility from my earliest days of practicing at the SEC, before the dawn of the Internet.
I noticed as a junior Corp Fin examiner sitting behind my metal desk and staring at my OS/2 powered PC with a giant tube monitor that a small cabal of practitioners seemed to hold all of the knowledge of what the Corp Fin Staff was thinking and what interpretations the Staff had taken over the years, so much so that they knew more than me about the Staff’s interpretive positions on important issues. Against this backdrop, I developed a keen appreciation for The Corporate Counsel newsletter, because Jesse Brill and Mike Gettelman did a fantastic job of chronicling (and sometimes extracting) the Staff’s important interpretive positions and communicating them to the world. In these formative years, I vowed to myself that I would one day try to improve this persistent information disparity, if for no better reason to prevent future Staffers from being schooled by knowledgeable practitioners that were hoarding the secrets of the temple.
Now, thankfully, the Office of Chief Counsel at the SEC kept quite good records of the interpretive positions that it had taken over time – I remember my awe when first discovering the wall of black binders that held records of interpretive positions taken by Office of Chief Counsel Staffers over decades of telephone calls. This was basically the securities law nerd’s equivalent of the Holy Grail. In a move that was very helpful to the Staff, a compilation of key interpretations was created and called the telephone interpretations manual, and that was available internally so that everyone could see the grand mosaic of the Staff’s interpretive work and factor that into filing reviews. Over the years, copy of the telephone interpretations manual had found its way out into the world (as such things are wont to do), thus contributing to the overall information asymmetry problem.
Enter now my old friend and mentor Marty Dunn, as well as several others serving in senior Corp Fin positions at the time. It was decided that the compilation of telephone interpretations would be made public, based on the rationale that providing these interpretive positions might reduce the number of telephone calls that came into Corp Fin. As Marty would always say, the public release of the telephone interpretations had the exact opposite effect, with more calls flooding in to ask questions about the answers provided in the interpretations!
When I returned to the SEC from my stint in private practice in the early 2000s, one of the projects that the Office of Chief Counsel was tasked with was reimagining the publicly available telephone interpretations. The thought was to transform many of the telephone interpretations into a question-and-answer format, as well as make the interpretations easier to update over time. We came up with the new name as a more descriptive way of identifying the interpretations, after many proposed names were rejected by Marty because the acronym sounded stupid (Marty had a thing about acronyms). I am forever grateful for the Staff’s hard work in reimagining those old telephone interpretations, and I think we collectively came up with a great system for communicating the Staff’s views that has withstood the test of time!
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The revised CDI is most definitely a proxy season classic. Question 126.03 addresses the very important topic of counting the “10 calendar day” period specified in Rule 14a-6 for the purpose of determining when a definitive proxy statement can be filed after filing a preliminary proxy statement. The importance of determining the tolling of the 10-calendar day period in Rule 14a-6 cannot be understated, because the Corp Fin Staff will not call a registrant to indicate that the Staff does not plan to review a preliminary proxy statement, so the registrant must wait the full 10 calendar days before filing and mailing a definitive proxy statement. In the revised CDI below, the Staff clarifies that the explanation of the 10 calendar day period in the interpretation assumes that the preliminary proxy statement is submitted before 5:30 eastern time and thus receives an EDGAR filing date for the date that the preliminary proxy statement was submitted:
Question 126.03
Question: How are “days” counted for purposes of the “10 calendar day” period in Rule 14a-6?
Answer: For purposes of calculating the “10 calendar day” period in Rule 14a-6, the date of filing is day one pursuant to Rule 14a-6(k). For example, if the preliminary proxy statement is filed on Friday, October 20, 2023, then Sunday, October 29, 2023, would be day ten for purposes of Rule 14a-6. The registrant may send the definitive proxy statement to security holders starting at 12:01 a.m. on October 30, 2023. The foregoing assumes that the preliminary proxy statement is submitted on or before 5:30 p.m. Eastern Time on October 20, 2023. If the filing is submitted after 5:30 p.m., the 10-day period does not start until the next business day, which would be Monday, October 23, 2023. See Rule 13(a)(2) of Regulation S-T. [November 17, 2023]
The Staff’s Friday Compliance and Disclosure Interpretation update also included three new universal proxy CDIs. The new Rule 14a-19 CDIs are as follows:
Question 139.07
Question: Rule 14a-19(e) mandates that each soliciting party in a non-exempt director election contest include all director nominees of all soliciting parties on each universal proxy card. As a result, in a contested director election, each soliciting party’s universal proxy card will include more nominees than director seats up for election. Rule 14a-19(e)(6) mandates that a universal proxy card prominently disclose the maximum number of director nominees for whom a shareholder may grant authority to vote. Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote “for” the election of more nominees than the number of director seats up for election (an “overvoted proxy card”) or fewer nominees than the number of director seats up for election (an “undervoted proxy card”). Can a soliciting party use discretionary authority to vote the shares represented by overvoted proxy cards in accordance with that party’s voting recommendation for the director election?
Answer: No. Rule 14a-4(e) provides that where a person solicited specifies on a proxy card “a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specifications so made.” When a shareholder has specified its choice(s) for the election of directors with an overvoted proxy card, the shares represented by an overvoted proxy card cannot as a practical matter be voted in accordance with the shareholder’s specifications. Because the shareholder has specified its choice(s) for the election of directors with an overvoted proxy card, a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an overvoted proxy card on the election of directors. Although the shares represented by an overvoted proxy card cannot be voted on the election of directors, such shares can be voted on other matters included on the proxy card for which there is no overvote and can be counted for purposes of determining a quorum. The treatment and effect of the corresponding voting instruction form (“VIF”) should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). The staff understands that some intermediaries will contact shareholders or beneficial owners to seek a correction of an overvoted proxy card or VIF before the meeting date. The interpretive position described in this CDI does not prohibit this helpful practice. [November 17, 2023]
Question 139.08
Question: Can a soliciting party use discretionary authority to vote the shares represented by undervoted proxy cards for the remaining director seats up for election in accordance with that party’s voting recommendation?
Answer: No. A shareholder has specified its choice(s) for the election of directors with an undervoted proxy card, and the shares represented by an undervoted proxy card can be voted in accordance with the shareholder’s specifications. See Rule 14a-4(e). Because the shareholder has specified its choice(s) for the election of directors with an undervoted proxy card, a soliciting party cannot rely on discretionary authority pursuant to Rule 14a-4(b)(1) to vote the shares represented by an undervoted proxy card for the remaining director seats up for election. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). [November 17, 2023]
Question 139.09
Question: Can a soliciting party use discretionary authority to vote the shares represented by a signed but unmarked proxy card in accordance with that party’s voting recommendations?
Answer: Yes. Because the shareholder has not specified any choices, the soliciting party can use discretionary authority in this manner and as permitted by Rule 14a-4(b)(1). Rule 14a-4(b)(1) states that “[a] proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the security holder,” so long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified. Note that Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card pursuant to Rule 14a-19(e)(7). [November 17, 2023]
In the gift that keeps on giving, the Staff also issued two new CDIs on Friday that address the content of solicitations before furnishing a proxy statement under Rule 14a-12 and when a proposal “involves” another matter within the meaning of Note A to Schedule 14A when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented. The two new CDIs are as follows:
Question 132.03
Question: Rule 14a-12 permits solicitations before the furnishing of a proxy statement, provided that, among other things, written soliciting material includes the required participant information or a prominent legend advising shareholders where they can find that information. See Rule 14a-12(a)(1)(i). Can a soliciting party satisfy Rule 14a-12(a)(1)(i) through a legend that only includes a general reference to filings made by the soliciting party or the participants (e.g., a legend that refers shareholders to the prior year annual report on Form 10-K and proxy statement for participant information)?
Answer: No. Rule 14a-12(a)(1)(i) requires a soliciting party to disclose the “identity of the participants in the solicitation…and a description of their direct or indirect interests, by security holdings or otherwise, or a prominent legend in clear, plain language advising security holders where they can obtain that information.” The availability of participant information allows shareholders evaluating soliciting materials to understand the interests of those soliciting the shareholders at the time when the solicitations occur, including before the shareholders receive a proxy statement. When the Commission amended Rule 14a-12 to expand the ability to solicit before furnishing a proxy statement, the Commission cited the legend information as one of the safeguards to protect against misleading solicitations and maintain the integrity of the solicitation process. See Section II.C.1. in Release No. 34-42055 (Oct. 22, 1999). General references in the legend to filings made or to be made by the soliciting party or participants do not sufficiently advise shareholders where they can obtain the required participant information. Instead, the legend should:
– clearly identify the specific filing(s) where participant information appears (including by filing date);
– clearly describe the specific locations of the participant information in such filings, whether by reference to the relevant section headings, captions or otherwise; and
– include active hyperlinks to the referenced filings, when possible.
Soliciting parties also are reminded that participants’ direct and indirect interests in the solicitation are not limited to such participants’ security holdings. [November 17, 2023]
Question 151.02
Question: A registrant closes the acquisition of another company in a transaction in which security holder approval is not required. A portion of the consideration paid in the acquisition consists of convertible securities that, at the holder’s option, can be converted into shares of the registrant’s common stock or, at the registrant’s option, cash. Following the acquisition, the registrant files a proxy statement to solicit security holder approval for the authorization of additional shares of common stock that it could issue upon the conversion of the securities issued in connection with the acquisition. Would the solicitation of security holder approval for the authorization of the additional shares of common stock “involve” the acquisition for purposes of Note A of Schedule 14A?
Answer: A proposal “involves” another matter within the meaning of Note A when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented. The determination as to whether there is a substantial likelihood that a reasonable security holder would consider the information important in making a voting decision on a proposal ultimately depends on all the relevant facts and circumstances.
The authorization of additional shares of common stock is an integral part of the acquisition because it is necessary for the registrant to meet its obligation under the convertible securities issued as consideration for the acquisition. Therefore, the proposal to authorize additional shares of common stock “involves” the acquisition. In such circumstances, the registrant would have to include in the proxy statement information about the acquisition called for by Schedule 14A, unless such information has already been disclosed or sufficient time has passed so that the registrant’s historical filings fully reflect the acquisition. [November 17, 2023]
It is always helpful to get new and revised guidance from the Corp Fin Staff, but it is particularly helpful to receive the guidance when you are tasked with writing a securities law blog during the short week of Thanksgiving! As a result, I am particularly thankful for these new and revised CDIs!
Yesterday, Glass Lewis announced the publication of its 2024 Voting Guidelines. We’ll be posting memos in our “Proxy Advisors” Practice Area. Here are excerpts from the intro highlighting some of the key changes:
Material Weaknesses – When a material weakness is reported and the company has not disclosed a remediation plan, or when a material weakness has been ongoing for more than one year and the company has not disclosed an updated remediation plan that clearly outlines the company’s progress toward remediating the material weakness, we will consider recommending that shareholders vote against all members of a company’s audit committee who served on the committee during the time when the material weakness was identified.
Cyber Risk Oversight – In instances where cyber-attacks have caused significant harm to shareholders, we will closely evaluate the board’s oversight of cybersecurity as well as the company’s response and disclosures. Moreover, in instances where a company has been materially impacted by a cyber-attack, we believe shareholders can reasonably expect periodic updates from the company communicating its ongoing progress towards resolving and remediating the impact of the cyber-attack. These disclosures should focus on the company’s response to address the impacts to affected stakeholders and should not reveal specific and/or technical details that could impede the company’s response or remediation of the incident or that could assist threat actors.
In instances where a company has been materially impacted by a cyber-attack, we may recommend against appropriate directors should we find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or are not provided to shareholders.
Board Oversight of Environmental and Social Issues – Given the importance of the board’s role in overseeing environmental and social risks, we believe that this responsibility should be formally designated and codified in the appropriate committee charters or other governing documents. When evaluating the board’s role in overseeing environmental and/or social issues, we will examine a company’s committee charters and governing documents to determine if the company has codified a meaningful level of oversight of and accountability for a company’s material environmental and social impacts.
Board Accountability for Climate-Related Issues – Beginning in 2024, Glass Lewis will apply this policy to companies in the S&P 500 index operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that the companies’ GHG emissions represent a financially material risk, as well as companies where we believe emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.
We will assess whether such companies have produced disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). We have further clarified that we will also assess whether these companies have disclosed explicit and clearly defined board-level oversight responsibilities for climate-related issues. In instances where we find either of these disclosures to be absent of significantly lacking, we may recommend voting against responsible directors.
Clawback Provisions – In addition to meeting listing requirements, effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive officer was terminated with or without cause. In these circumstances, rationale should be provided if the company determines ultimately to refrain from recouping compensation as well as disclosure of alternative measures that are instead pursued, such as the exercise of negative discretion on future payments.
Other policy changes address executive stock ownership guidelines, proposals concerning equity awards to shareholders, NOL pills and control share acquisition statutes. Glass Lewis also adopted clarifying amendments to its policies on board responsiveness and interlocking directorates.
By the way, don’t forget that ISS’s peer group review & submission window for most companies opens on Monday, November 20th. Check out Liz’s blog on CompensationStandards.com for more details.
I think it’s fairly common for people involved in internal investigations to feel uncertainty about the investigatory process and to have concerns about whether that process conforms to best practices. If you find yourself worrying about these issues, this recent blog from “Compliance & Ethics: Ideas and Answers” may be helpful. It identifies areas of inquiry that should be considered in evaluating investigation processes. This excerpt provides some examples:
– Are there written guidelines governing how investigations will be assigned? Are they logical and appropriate? Are they followed in practice?
– Is there a written investigations protocol, and does it include those elements that are necessary to facilitate robust investigations? Some of the elements that are typically included in investigations manuals include:
– Professionalism standards that govern the investigations process, such as a discussion of the importance of impartiality, competency, confidentiality, and non-retaliation.
– Step-by-step guides for each aspect of investigations, including intake procedures, preliminary analysis of the allegation, assigning investigations, opening a case file, creating an investigative plan, reviewing documents, whom to interview and how to do so, preparing interview notes, assessing and determining findings, preparing a final report, responding to the complainant and subject, and closing out the case.
– Samples and outlines of investigation documents, such as reports of interviews, reports of investigation, and sample communications with interviewees, complainants, supervisors, and subjects of investigations.
– Are there protocols that govern how evidence can be collected (e.g., required approvals before electronic data is accessed) and when and how litigation or investigation holds will be issued?
– Are there clear guidelines governing when to get the Legal Department involved and the steps to be taken when conducting an inquiry under the attorney-client privilege?
The blog says that, ultimately, an effective assessment of an investigation’s process seeks to determine whether it is being conducted independently, objectively and impartially, whether the investigators have the access to the people and documents they need, and whether the investigator is qualified to conduct the investigation.
The PCAOB recently proposed amendments to its rules governing when an individual accountant will be deemed to have contributed to a firm’s primary violations of professional standards. This excerpt from Dan Goelzer’s blog on the proposal summarizes its implications:
The Public Company Accounting Oversight Board has proposed to amend its rule governing the liability of a person associated with an accounting firm whose conduct causes the firm to violate a professional standard. The Board’s proposal would lower the level of conduct that can result in an individual’s “contributory liability” for a firm’s violation from recklessness to negligence.
If the change is adopted, the PCAOB would be able to bring disciplinary proceedings against an individual auditor (and potentially bar him or her from public company auditing) for failing to exercise reasonable or ordinary care. Under its current rules, the Board would have to show that the individual’s conduct was intentional or reckless, not merely negligent.
The proposal is unlikely to be welcomed by your friendly neighborhood auditor. Most audit firms have a black belt in “CYA” and already go to extraordinary lengths to protect themselves during the course of an audit engagement. Lowering the bar for enforcement actions against individual accountants will undoubtedly spur increased efforts on their behalf to protect their firms & themselves.
When you consider the possibility that a change like this could come on the heels of the adoption of the PCAOB’s demanding NOCLAR proposal, it sure looks like dealing with your outside auditors could become an even more difficult, painstaking, and expensive process in the near future.
