In what may be an ominous sign for the SEC’s share repurchase disclosure rule, the 5th Circuit has denied the Commission’s motion to request more time to substantiate its decision to adopt the new requirements. I blogged yesterday that the SEC issued a stay order for the rule at the same time that it filed this court motion. This Gibson Dunn blog explains what will happen next:
As a result, the SEC has until November 30 to correct the deficiencies the court had found with the SEC’s rulemaking, after which we expect the court will consider a renewed motion from the petitioners to vacate the Repurchase Rule.
The blog points out that companies can rely on the stay until the SEC or the Fifth Circuit take additional action on the Repurchase Rule. See this blog from Cooley’s Cydney Posner for more details about the litigation.
Last week was an incredibly active holiday week for Corp Fin, with several rounds of CDIs that Dave covered in this blog. But there’s more! Here’s something Meredith blogged yesterday on CompensationStandards.com:
Just before Thanksgiving, the SEC gave us even more to be thankful for — eight new and two revised CDIs on the pay-versus-performance disclosure requirements. I’ve paraphrased each new CDI and linked to the full text below.
1. New Question 128D.23 – Dividends or dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of total compensation must be included in the calculation of executive compensation actually paid.
2. New Question 128D.24 – If a registrant uses more than one published industry or line-of-business index for purposes of Item 201(e)(1)(ii), the registrant may choose which index it uses for purposes of its PvP disclosure and should include a footnote disclosing the index chosen. If the registrant chooses to use a different published industry or line-of-business index from that used by it for the immediately preceding fiscal year, it is required to explain the reasons for the change in a footnote and provide a comparison against both the newly selected peer group and the peer group used in the immediately preceding fiscal year.
3. New Question 128D.25 – A registrant may not use the broad-based equity index it uses to determine the vesting of performance-based equity awards based on relative TSR as its peer group for purposes of Item 402(v)(2)(iv).
4. New Question 128D.26 – Market capitalization-based weighting is required for purposes of Item 402(v)(2)(iv) only if the registrant is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii).
5. New Question 128D.27 – If a registrant uses a benchmarking peer group and adds or removes companies, is it required to footnote the changes and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However, if an entity is omitted solely because it is no longer in the business or industry or the changes were made pursuant to pre-established objective criteria, presenting both comparisons is not required, but a specific description of the change and the basis for the change must be disclosed, including the names of the companies removed. This is consistent with CDI 206.05 regarding disclosure under Item 201.
6. New Question 128D.28 – The staff will not object if a registrant that loses SRC status as of January 1, 2024 continues to include scaled disclosure under 402(v)(8) in its proxy filed not later than 120 days after its 2023 fiscal year end, forward incorporated into the 10-K. The PvP disclosure must cover fiscal years 2021, 2022, and 2023.
Unless the registrant subsequently regains SRC status, any other proxy filed after January 1, 2024 must include non-scaled PvP disclosure. However, a registrant generally is not required to revise disclosure for prior years to conform to non-SRC status, and the staff will not object if the registrant does not add disclosure for a year prior to those included in the first filing with PvP disclosure. But the registrant should include peer TSR — measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table — and its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the table, and disclosure provided for all fiscal years must be XBRL tagged.
7. New Question 128D.29 – The registrant is required to include PvP disclosure in any proxy or information statement filed after it loses its EGC status, but may apply the transitional relief in Instruction 1 to Item 402(v) (that disclosure may be provided for three years instead of five in the first filing with PvP disclosure and an additional year in each of the two subsequent annual filings).
8. New Question 128D.30 – When multiple individuals served as PFO during one covered fiscal year, for purposes of calculating average compensation for the NEOs other than the PEO, the registrant may not treat the PFOs as the equivalent of one NEO. Each must be included individually in the calculation of the average, but additional disclosure regarding the impact on the calculation should be considered.
I’ve also included marked versions of the revised CDIs.
Question: In each of 2020 and 2021, a registrant provided the same list of companies as a peer group in its Compensation Discussion & Analysis (“CD&A”) under Item 402(b) but provided a different list of companies in its CD&A for 2022. With respect to a registrant providing initial Pay versus Performance disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K), may the registrant present the peer group total shareholder return for each of the three years using the 2022 peer group?
Answer: No. In this situation, the registrant should present the peer group total shareholder return for each year in the table using the peer group disclosed in its CD&A for such year. In the 2024 proxy statement, if the registrant uses the same peer group for 2023 as it used for 2022, the registrant should present its peer group total shareholder return for each of the years in the table using the 2023 peer group. If it changes the peer group in subsequent years, it must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv).
Question: Some stock and option awards allow for accelerated vesting if the holder of such awards becomes retirement eligible. If retirement eligibility was the onlysole vesting condition, would this condition be considered satisfied for purposes of the Item 402(v) of Regulation S-K disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible?
Answer: Yes. However, for awards with additional substantive conditions, in addition to if retirement eligibility, such as a market is not the sole vesting condition as described in Question 128D.16, those, other substantive conditions must also be considered in determining when an award has vested. Such conditions would include, but not be limited to, a market condition as described in Question 128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.
During its 89 years of existence, the SEC has operated under a 3-part mission that many of us have committed to heart:
– Protect investors
– Maintain fair, orderly, and efficient markets
– Facilitate capital formation
A bill that’s in its early stages in Congress is looking to “modernize” that mission by expressly adding the word “innovation” to 15 USC 77b and 15 USC 77c (and the corresponding provisions under the Investment Company Act), so that they would read as follows:
Consideration of promotion of efficiency, innovation, competition, and capital formation
Whenever pursuant to this chapter the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, innovation, competition, and capital formation.
The primary focus of this bill is to provide for a system of regulation of digital assets by the CFTC and the SEC, so you might think that this wording change is simply encouraging special rules for digital assets, as those in the crypto space have been urging for quite some time. But the author of this op-ed in The Hill says the change would go further than that:
Such a small change might have a monumental impact, requiring the SEC to consider whether its actions promote or harm innovation.
Greater oversight or even an SEC overhaul might be needed, but better prioritization of innovation is a good place to begin. It could moderate the SEC’s noted perceptions of hostility towards novel sectors of the economy and move the agency’s focus away from social issues outside its intended domain.
Last Wednesday, holiday magic arrived early for securities lawyers, when the SEC officially stayed the repurchase disclosure rule that would call for detailed disclosures in upcoming Form 10-Ks. The Thanksgiving Eve announcement followed a court ruling last month in which the 5th Circuit held that the rulemaking was “arbitrary & capricious” and ordered the Commission to fix it by November 30th. The rule had been challenged by the US Chamber of Commerce and other business groups.
The Commission issued the stay on the same day that it filed a motion with the court. The motion states that since the remand, the SEC’s staff has worked diligently to ascertain the steps necessary to comply with the court’s remand order and has determined that doing so will require additional time. Accordingly, the motion is for the court to extend the period of the remand – without in the meantime the court vacating the rule. The SEC’s motion stated that if the court grants the requested extension, the SEC will provide an update to the court within 60 days on the status of the SEC’s efforts to remedy the rule’s defects.
The court hasn’t ruled on the motion, and the Chamber is opposed to the extension. While we await that ruling, it’s important to note that this order doesn’t vacate the rule – it merely stays the compliance date pending further SEC action. Stay tuned.
Update: Cooley’s Cydney Posner blogged this morning that the court denied the SEC’s order over the weekend. We may know the fate of the rule later this week…
Last week’s stay put a pause on the requirement to disclose Rule 10b5-1 plans that companies adopt to effect stock buybacks, but it doesn’t affect the requirements to disclose Rule 10b5-1 plans adopted by directors & officers. Those requirements stem from a separate rule that is already in effect (you can visit our “Rule 10b5-1 Plans” Practice Area for lots of practical guidance on what to do).
A recent Form 8-K and WSJ article underscore that plan disclosures get attention and should be handled with care. Here’s an excerpt:
Dimon, the chief executive, intends to sell one million of his current 8.6 million shares “for financial diversification and tax-planning purposes,” the bank said Friday in a filing.
After years of accumulating shares and using his buying as a signal of his belief in the bank, the shift to paring back is likely to raise questions about how much longer the 67-year-old Dimon intends to stay at the helm and whether he is beginning to contemplate the next steps.
This particular article is reporting on Jamie Dimon’s Rule 10b5-1 plan to sell 12% of his current holdings in JPMorgan Chase beginning in 2024. It notes that the company’s stock price dropped by 3.6% on the day the plan was announced. But it also is careful to point out:
But the bank said Friday that his planned stock sale wasn’t a change in his direction. And there are other signs that he isn’t dumping stock because of a change of heart.
He could sell all one million shares today, as it is currently an open window for JPMorgan executives. Instead, he set up a plan to sell them starting in the coming year at predetermined intervals or prices, showing he isn’t rushing for the exit. Such plans are common for executives. He will still own $1 billion in stock after the sales.
Obviously, not every plan adoption will be headline news like this one, which the company voluntarily reported on Form 8-K in advance of the required quarterly disclosure. But you also can’t count on every media outlet explaining the nuance of planned trading like an experienced WSJ reporter, or the market understanding those nuances.
So, keep in mind that as you prepare for the usual flurry of year-end transactions and look ahead to your Form 10-K, insider ownership reporting will be more sensitive than ever. Investors may read into the cumulative number of shares that an insider plans to sell, even if the shares are being “trickled out” over a long time period and may not have drawn as much attention if each trade was simply reported separately on a Form 4. And if you haven’t already done so, don’t forget to freshen up your internal controls to ensure that you properly report these plans in the first place.
If you haven’t renewed your Section16.net membership for 2024, now is the time! You don’t want to miss Alan Dye’s take on the latest developments, which he’ll be sharing in his annual webcast on that site on January 24th. Contact info@ccrcorp.com if you have questions about your renewal or sales@ccrcorp.com if you want to begin a new membership.
This is wild, and hopefully not a sign of things to come:
In a move that may set a record for hacking chutzpah, a cyber ransom gang has filed a complaint with the SEC reporting that a company they hacked had failed to report the incident to the SEC within the time required by the agency’s new cybersecurity disclosure guidelines. The gang apparently filed the complaint after the hacked company failed to respond to the hackers’ ransom demand. The hacking incident and the SEC report were first reported in a November 15, 2023 post on the DataBreaches.net site, and further detailed in a November 15, 2023 post on the BleepingComputer.com site.
That’s from this D&O Diary blog, and Kevin LaCroix goes on to detail why the new SEC rule isn’t the “golden ticket” that these hackers thought it was:
First, the hackers alleged that MeridianLink violated the cybersecurity disclosure guidelines by failing to make the requisite disclosure under Item 1.05 of Form 8-K within the stipulate four business days. However, the cybersecurity incident current report disclosure obligation of Item 1.05 does not go into effect until December 18, 2023, and the current reporting obligation does not go into effect for smaller reporting companies until June 15, 2024. (For further detail about the effective dates of the new cybersecurity disclosure rules, refer here.)
Second, even if the disclosure requirement were otherwise in effect, it may or may not have been triggered here. The new rules state that the cyber incident reporting is “due four business days after a registrant determines that a cybersecurity incident is material.” (Companies cannot “unreasonably delay” the determination that they need to disclose an incident.)
While the hackers in their SEC complaint described the incident as constituting a “significant breach,” MeridianLink’s description of the incident in its statement to DataBreaches.net stated that the company had “identified no evidence of unauthorized access to our production platforms, and the incident has cause minimal business interruption.” MeridianLink may well contend that it has made no determination that the incident was “material,” and therefor that the four-day reporting period was not even triggered.
Does it matter whether the hackers understand securities laws? Kevin points out that for companies that want to avoid public attention & regulatory scrutiny, the specter of enforcement & litigation could give hackers additional leverage for their extortion schemes. As the many resources in our “Cybersecurity” Practice Area explain, the SEC rules don’t require reporting immaterial incidents (or attempted incidents). Nevertheless, I guess we now have to worry about the bad guys beating us to the punch in reporting their crimes.
Yesterday, ISS Governance announced the launch of its open comment period on proposed changes to its benchmark voting policies. During this open comment period, ISS Governance gathers views from stakeholders on its proposed voting policy changes for 2024 (and beyond). The comment period runs through 5:00 p.m. Eastern time on November 30, 2023.
Notably, ISS Governance does not solicit comments for any policy changes in the US market. I honestly cannot remember a time when ISS did not propose changes to its benchmark voting policies for the US market, so this seems like something to be truly thankful for this holiday season!
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!
