Yesterday afternoon, as reported by the WSJ, the SEC’s official X account @SECGov briefly stated bitcoin ETFs had been approved. Bitcoin prices shot up to nearly $48,000 before Chair Gensler clarified, also on X, that the post was unauthorized, the official account had been compromised and the SEC had not approved the listing and trading of spot bitcoin exchange-traded products. Here’s more from the article:
An SEC spokeswoman said that an unknown party had accessed the agency’s X account for a brief period after 4 p.m. The SEC will work with law enforcement to investigate the episode and pursue “next steps relating to both the unauthorized access and any related misconduct,” she added.
The article also explains that the tweet was well-timed:
Crypto investors have been eagerly anticipating an SEC green light for spot bitcoin ETFs from big asset managers such as BlackRock and Fidelity Investments, after a more-than-decadelong wait. Analysts say approval is highly likely after a flurry of activity in which SEC staff, ETF issuers and exchanges hashed out technical details for the funds’ operations in recent weeks.
Wednesday is the deadline for the SEC to approve or reject the listing of just one fund, a joint venture from Cathie Wood’s ARK Investment Management and crypto asset manager 21Shares. But several competing funds are also in the final stages of the process, and ETF executives expect multiple approvals to come at once, so one fund doesn’t gain a first-mover advantage. Fund managers have slashed their fees and launched advertising campaigns in anticipation that the ETFs will start trading.
Late last night, X, through the account @Safety, posted its explanation of how the SEC’s account was compromised.
– The proposed scope is overly broad. Investors and investor associations had inconsistent views. Some believe the proposed requirements are sufficiently clear while others expressed concerns about the scope of proposal and the potential negative impact on auditor effectiveness.
– The proposed requirements blur the roles of the auditor and a company’s management and legal functions creating auditor independence concerns. The investor community had mixed views on this topic as well. While some investor associations view the proposed requirements as a function of management, others do not view the proposed auditor responsibilities as a replacement or duplication of management’s functions.
– Auditors are not lawyers: The business community expressed strong and consistent views that auditors are not legal experts. Audit committee members, preparers, and business associations raised concerns the proposal will significantly increase risk to a company’s legal privilege. The investor community’s views continued to be mixed. Certain investors and investor associations do not believe that the proposal requires auditors to function as lawyers; whereas other investor associations believe that auditors are not trained in law nor qualified to make the legal judgments that would be required by the proposal.
– Costs and benefits: The business community believes that the anticipated benefits of the proposal do not justify the costs and that the economic analysis is inadequate. The investor community’s views varied. Some investor associations commented that the benefits would outweigh the costs, while others expressed the opposite view, that the risks of financial misstatements and NOCLAR far outweigh the costs of audits.
– Need for further study and evaluation: The broad consensus among the majority of stakeholder groups is that there is a need for multi-stakeholder engagement and further evaluation before acceptable alternatives to the proposal can be developed, and that the PCAOB needs to conduct more research and engage in an open standard-setting process involving roundtable discussions and public meetings with various stakeholder groups before issuing a revised proposal.
The concern expressed under “Auditors are not lawyers” was more fully fleshed out by Jay Knight of Barnes & Thornburg in a recent podcast with John. John asked Jay about the most significant concerns from a lawyer’s perspective. Jay replied:
[T]hat the proposed standards do not adequately take into account the importance of protecting confidential client information, attorney-client privilege and attorney work product. As your listeners know, the confidentiality of attorney-client communications is a bedrock principle of the legal system. […] To satisfy the expansive requirements under the proposed standards, however, auditors would likely need to seek information and analysis from their audit client regarding information protected as confidential under the rules of professional conduct, legal advice that has been communicated and is protected by the attorney-client privilege and protected attorney work product that has been prepared to enable them to assess compliance with any given set of regulations. […] The release fails to consider these important protections and the risk of eroding these protections if the proposed standards are adopted.
On the last point from the CAQ regarding the need for further engagement, it appears that the PCAOB is already moving in this direction. Liz blogged last week about PCAOB Chair Erica Williams’s defense of the NOCLAR proposal during testimony before the House Financial Services Committee’s Capital Markets Subcommittee. In that testimony, she suggested that the PCAOB would be holding a public roundtable for additional feedback on the proposal.
In the latest “Timely Takes” podcast, John discusses “pass-through voting” with Karla Bos of Aon. In this 15-minute podcast, Karla and John discuss:
What is “pass-through voting” and why has it been gaining traction?
What are the implications of the growth in pass-through voting for the influence of proxy advisors?
What are pass-through voting’s implications for levels of support for shareholder proposals?
How might the growth of pass-through voting influence the way companies engage with investors?
As an aside, I think of Karla as somewhat of a celebrity of efficiency and list-making — those of you who read this blog in 2018 may agree. I really appreciated her list of 18 things she accomplished before 8:30 am. Maybe even just her use of the word “accomplished” reframed things for me and made me feel differently about my mornings. It reminded me that all those things we do in the morning (or any time) that aren’t paid work deserve to be treated as productive and worthwhile — because they are — and we should give ourselves credit for them. For me, even, or maybe especially, when it feels like getting my kids to school took an entire day’s worth of energy.
Anyway, as always, if you have insights on a securities law, capital markets or corporate governance trend or development — whether in list form or otherwise — that you’d like to share in a podcast, please reach out to me or John at mervine@ccrcorp.com or john@thecorporatecounsel.net.
At Microsoft’s early December annual meeting, a shareholder proposal on AI “misinformation and disinformation” was supported by 21% of the votes cast. Per the proxy, Proposal 13 requested that “the Board issue a report, at reasonable cost, omitting proprietary or legally privileged information, to be published within one year of the Annual Meeting and updated annually thereafter, assessing the risks to the Company’s operations and finances as well as risks to public welfare presented by the company’s role in facilitating misinformation and disinformation disseminated or generated via artificial intelligence, and what steps, if any, the company plans to remediate those harms, and the effectiveness of such efforts.” The supporting statement by Arjuna Capital focuses on the threat that such misinformation may pose to democracy “by manipulating public opinion, undermining institutional trust, and swaying elections” particularly given that 2024 brings the “United States presidential election and significant Senate and House races.”
Multiple outlets, including Responsible Investor and this blog from Arjuna Capital, have cited that six late 2023 proposals on AI transparency are “pioneering” and the first of their kind. Apple and Disney were another two of the six companies that received such proposals — both were from AFL-CIO Equity Index Funds and the proponents’ supporting statements were less specifically focused on the threat to democracy. The proposal received by Disney is worded as follows:
Shareholders request that The Walt Disney Company (the “Company”) prepare and publicly disclose on the Company’s website a transparency report that explains the Company’s use of Artificial Intelligence (“AI”) in its business operations and the Board’s role in overseeing AI usage, and sets forth any ethical guidelines that the company has adopted regarding its use of AI. This report shall be prepared at a reasonable cost and omit information that is proprietary, privileged, or violative of contractual obligations.
Both Disney and Apple sought to exclude the AI transparency proposals under Rule 14a-8(i)(7) on the basis that they deal with ordinary business operations and seek to micromanage the companies. The Staff was unable to concur, so we’ll watch how things shake out with these and similar shareholder proposals during the 2024 proxy season.
We’ll be tracking this trending topic — including vote results at companies where AI-related proposals end up on the ballot — on our Proxy Season Blog where we continue to regularly post new items for TheCorporateCounsel.net members. Members can sign up to get that blog pushed via email whenever there is a new post. If you do not have access to the Proxy Season Blog or all the other great resources on TheCorporateCounsel.net, sign up today.
A recent research paper from CII examined 2023 proxy statements of S&P 100 companies to analyze CEO and management succession planning disclosures. The paper summarized the disclosures as follows:
More than 75% of these companies made disclosures about the role of the board and board committees in management succession planning, while less than 20% discussed their processes to identify and include diverse candidates, the capabilities in the next CEO that they believe would align with the company’s long-term strategy and the measures they have taken to identify external candidates. […]
All but four companies in the S&P 100 disclosed at least one of the nine elements of management succession planning in their 2023 proxy statements, and only one company did not mention management succession planning at all in its proxy statement. The 2023 proxy statements for S&P 100 companies included an average of 3.7 (median = 4.0) of the nine succession planning elements identified for this paper.
The “elements” CII looked for in the proxy statement disclosure are listed below. The report also gives sample disclosures in each category.
1. Role of the board as a whole
2. Involvement of board committee(s)
3. Role of the incumbent CEO
4. Board consideration of the capabilities in the next CEO that would align with the company’s
long-term strategy
5. Measures taken to identify internal candidates
6. Board’s assertion that it has taken steps to identify external candidates
7. Board’s assertion that it has processes to identify and include “diverse” candidates
8. Plans that address short-term succession scenarios
9. Plans that address long-term succession scenarios
This 2023 Skadden alert notes that “many companies have continued to conduct due diligence and file full conflict minerals reports with the SEC, given already implemented diligence processes, existing contractual obligations and the expectations of interested stakeholders” since the April 2017 Corp Fin no-action statement indicating the Division would not recommend enforcement against companies for not complying with the requirements of the conflict minerals rules to conduct due diligence and file a report. After all, companies remain obligated to file a Form SD. That being said, I suspect conflict minerals reports have gotten less attention than before the no-action relief and, for some companies, have become a check-the-box exercise.
This Ropes & Gray alert describes how other external pressures have put attention back on conflict minerals due diligence since the information gathered is now relevant to other compliance considerations and ESG-related supply chain concerns. Specifically:
Over the last ten years, information reported by suppliers has required companies to consider the applicability of North Korea, Venezuela, Myanmar and Russia sanctions. Companies also have had to consider reports alleging forced and/or child labor in the 3TG supply chain, among other potential concerns, that potentially implicate supply chain and human rights policies and import restrictions.
The alert goes on to describe additional developments relevant to 2024 conflict minerals reports “that may have compliance and disclosure ramifications beyond the Conflict Minerals Rule.” Those include a new NGO report that alleged linkages between certain Chinese gold refiners and the Xinjiang region of China, which has implications under the Uyghur Forced Labor Prevention Act, and Russia sanctions — including relating to Russian gold and tungsten — which have been strengthened in multiple jurisdictions. Here are the takeaways from the alert:
– Consider the broader context of 2023 3TG smelter and refiner and other information reported by supply chains. Is the information potentially relevant to a sanctions or forced labor compliance analysis? Does reported information potentially implicate human rights risk assessments and/or human rights and supply chain policies? Is the information being appropriately considered in the context of modern slavery transparency and mandatory human rights due diligence legislation and the EU’s new Corporate Sustainability Reporting Directive?
– Be mindful of data limitations. Most suppliers report 3TG sourcing information at the “company level,” i.e., for all their products rather than those supplied to the requesting downstream commercial customer. Therefore, smelters and refiners reported by a supplier may not be in the requesting downstream customer’s supply chain. Reported information also often presents other validation concerns.
– There isn’t a one-size-fits-all approach to address the watch-outs highlighted in this post. The analysis and appropriate compliance and risk mitigation steps (if any) will depend upon numerous company- and supply chain-specific factors, among other things. However, given the evolving regulatory landscape – both transparency and substantive compliance requirements – it is becoming increasingly important for companies to consider the broader implications of 3TG sourcing and compliance information received from suppliers.
This time last year, we were blogging about the SEC Staff’s first few rounds of climate change comment letters, which were preceded by Corp Fin posting a sample. This Bloomberg Law article reports that the SEC Staff has sent climate-related letters to more than 12 companies in the past three months.
The comments seem to be pretty consistent with earlier rounds — the letters focus on consistency between disclosures in sustainability reports and SEC filings and inquire about the impact of severe weather and how climate risk impacts customer demand and competition. And also, like the prior rounds of comments, the SEC Staff has gotten into the nitty-gritty with companies on the impact of climate change — insisting on details — and the article describes at least one company that has agreed to revise disclosures.
Here are some of the response letters available on EDGAR for those interested:
The TL;DR is this: For companies in annual reporting season, know that SEC comments on climate disclosures continue apace, and the Staff is not waiting on final rules. In terms of what to expect, the newest letters seem consistent with Corp Fin’s sample comment letter.
Last Friday, the SEC announced the appointment of University of Denver law prof Stacey Bowers as the new director of the SEC’s Office of the Advocate for Small Business Capital Formation (OASB). The announcement highlights her service on the SEC’s Small Business Capital Formation Advisory Committee this past year. As a reminder, the press release summarizes what the OASB is and what it does:
OASB is an independent office established in January 2019 to advance the interests of small businesses and their investors in the capital formation process. The office proactively works to identify and address unique capital formation challenges faced by small businesses, particularly those that are minority-owned or women-owned or located in rural or natural disaster areas.
– Related Party Transaction Due Diligence and Process
– Interplay with Other Considerations
– Wrap-Up & Recent Enforcement Focus
Our panelists shared practical tips for improving your related party transaction process right now in preparation for proxy season, including how to improve your D&O questionnaire process, involve your accounts payable and HR teams, and update your related party information on a more regular basis to ensure potential related party transactions are flagged in advance.
Members of this site can access the transcript of this program and all of our other webcasts by visiting the “archives page.” If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
It’s hard to believe that 7 years have passed since the SEC issued its report declaring that digital assets were “securities” and former Chair Jay Clayton cautioned investors to be wary of unregistered offerings of tokens (or “ICOs,” as they were called back then). This WSJ article calls the SEC’s fight with the crypto industry the agency’s “forever war.” They might be right! The saga isn’t showing signs of wrapping up anytime soon.
Later this month, a judge will hear the Commission’s most-watched crypto case – against Coinbase. The SEC recently shot down the crypto exchange’s rulemaking petition (despite disagreement from Commissioners Peirce & Uyeda). The SEC’s letter reiterates the view that the existing securities law framework will work just fine for digital assets and coming up with a special framework is not a regulatory priority at this time:
The Commission disagrees with the Petition’s assertion that application of existing securities statutes and regulations to crypto asset securities, issuers of those securities, and intermediaries in the trading, settlement, and custody of those securities is unworkable.
Although the formal letter denying the petition was brief, the supporting statement from SEC Chair Gary Gensler was not. Here’s an excerpt:
Existing laws and regulations already apply to the crypto securities markets.
There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws. Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds. Instead, Congress included a long list of 30-plus items in the definition of a security, including the term “investment contract.”
As articulated in the famous Supreme Court decision, SEC v. W.J. Howey Co., an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The Howey Court said that the definition of an investment contract “embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” This test has been reaffirmed by the Supreme Court numerous times—the Court cited Howey as recently as 2019.
But wait, there’s more. The Coinbase hearing will follow a recent court victory for the SEC in its case against a token issuer – Terraform – in which the Commission alleged that token sales violated Section 5 of the Securities Act. The company’s defense turned on whether the tokens were “securities” – and the case is going to a civil trial after US District Judge Jed Rakoff issued this 71-page opinion in late December. Judge Rakoff applied the “Howey test” to UST, LUNA, wLUNA, and MIR and found they passed “with flying colors.” Here’s an excerpt (see this Coingeek article for more commentary):
Defendants’ first argument in effect asks this Court to cast aside decades of settled law of the Supreme Court and the Second Circuit. In the seminal decision of SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court held in no uncertain terms that “an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 298-99, 66 S.Ct. 1100. Defendants urge this Court to scrap that definition, deeming it “dicta” that is the product of statutory interpretation of a bygone era. The Court declines defendants’ invitation. Howey’s definition of “investment contract” was and remains a binding statement of the law, not dicta. And even if, in some conceivable reality, the Supreme Court intended the definition to be dicta, that is of no moment because the Second Circuit has likewise adopted the Howey test as the law. See, e.g., Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).
There is no genuine dispute that the elements of the Howey test — “(i) investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others” (id.) — have been met for UST, LUNA, wLUNA, and MIR.
The WSJ article says it’s unlikely we’ll see a resolution this year to the Coinbase litigation or the bigger question of whether & how SEC regulations apply to digital assets. There are very bright & experienced lawyers on both sides of the SEC’s battle to regulate crypto, and it looks like they’re all digging in for a long fight.
