Last week, the SEC announced another enforcement action against a company for using separation agreements that violated whistleblower protection rules. The SEC’s Enforcement Division has been on the lookout for these provisions for years — in 2016, the SEC launched a campaign to enforce these rules and brought another enforcement action on this topic as recently as last year.
In this latest enforcement action, the SEC took issue with the company’s use of separation agreements that included a waiver of rights to monetary awards in connection with filing claims or participating in government agency investigations. The order found that those waivers impeded participation in the SEC’s whistleblower program since employees were required to forgo “important financial incentives that are intended to encourage people to communicate directly with SEC staff about possible securities law violations.”
I’m not positive that this was the first of this type of enforcement action against a privately held company, but the SEC highlighted that the respondent in this enforcement action was privately held in its announcement. The press release included this quote from a Regional Director:
“Both private and public companies must understand that they cannot take actions or use separation agreements that in any way disincentivize employees from communicating with SEC staff about potential violations of the federal securities laws,” said Jason J. Burt, Regional Director of the SEC’s Denver Office. “Any attempt to stifle or discourage this type of communication undermines our regulatory oversight and will be dealt with appropriately.”
As Liz blogged last week, this year Glass Lewis is running a policy survey seeking feedback on specific governance, sustainability, and executive compensation topics, which is a departure from its less formal approach in prior years. NYSE’s ESG Advisory group recently highlighted in its ESG Top 5 newsletter that the survey is open to the broader community. The newsletter summarizes the survey’s topics as follows:
[G]overnance themes covered focus heavily on overboarding (should committee chair roles count as more than one board), mitigating factors for allowing multi-class shares, and one of our favorites, the validity of the “loyalty share” voting classes that give extra voting rights to long-term holders. On the E&S front, GL asks about the non-financial inputs to exec comp programs, as well as how to evaluate biodiversity and company GHG targets.
For valuable insight from ISS and Glass Lewis, sign up for our “Proxy Disclosure & 20th Annual Executive Compensation Conferences,” and do it soon because they’re happening next week already! As Liz recently highlighted, our panel on “Navigating ISS & Glass Lewis” features a conversation with Rachel Hedrick – who is VP of US Executive Compensation Research at ISS – and Krishna Shah – who is Director of North America Executive Compensation at Glass Lewis – moderated by Davis Polk’s Ning Chiu.
In late August, the SEC announced an enforcement action involving multiple accounting failures by Plug Power — including failures to properly account for right-of-use assets and lease liabilities for sale-leasebacks, properly classify and present certain R&D activities as cost of revenue, properly estimate loss accruals for extended-maintenance contracts and properly account for bonus expense and certain conversions of Plug’s convertible preferred stock. These issues were identified during the audit of the company’s 2020 financial statements, and the company filed a Form 12b-25 and subsequently restated annual financial statements for 2018 and 2019 and interim quarterly financial statements for 2019 and 2020.
Although the company began implementing a remediation plan in 2021 — including hiring 60 new employees in accounting, finance and internal audit — the SEC seemed particularly concerned that some material weaknesses remained, as disclosed in the company’s 10-K for 2022. As highlighted by this Cooley PubCo blog, in addition to a civil penalty of $1.25 million, the settlement also includes an additional penalty of $5 million if Plug fails to comply with any undertakings — including that it fully remediate the material weaknesses in ICFR and ineffective DCP within one year.
The blog also notes an important point Plug got right in this process — it indicated in its Form 12b-25 that there could be adjustments to prior periods, signaling a possible restatement. The SEC took issue with forms missing this disclosure in other administrative proceedings in late August.
As a reminder, enforcement has been very focused on restatements and material weaknesses recently. As I blogged back in May, according to this Cornerstone Research report, in 2022, enforcement actions referring to announced restatements and/or material weaknesses in internal control reached the highest level in recent years and also grew as a percentage of all actions initiated during the year.
A week after the Plug Power enforcement action, the SEC announced settled charges against Fluor Corporation and five current and former officers and employees alleged to have caused Fluor’s violations. Fluor agreed to pay a civil penalty of $14.5 million and the officers and employees agreed to penalties ranging from $15,000 to $25,000.
Unlike Plug Power, the SEC’s investigation predated the company’s decision to restate. The investigation was prompted by Fluor’s August 2019 announcement of “$714 million in pre-tax charges stemming from an ‘operational and strategic review’ of sixteen projects.” As a result of the SEC’s inquiry, Fluor undertook an internal investigation in 2020 that identified material weaknesses in ICFR and material errors in its financial statements, causing the company to restate its annual and quarterly financial statements for 2016 through the third quarter of 2019. Here’s a summary of the accounting failures from the SEC’s announcement:
The SEC’s order found that Fluor, a global engineering, procurement, and construction company, bid on the two projects relying on overly optimistic cost and timing estimates and subsequently experienced cost overruns that worsened over time. Fluor then failed to sufficiently maintain internal controls to account for the projects in accordance with the percentage of completion accounting method under U.S. generally accepted accounting principles (GAAP). According to the SEC’s order, Fluor failed to include all anticipated costs that were known or should have been known in each project’s respective forecasts—thereby delaying loss recognition on each. Additionally, Fluor improperly incorporated revenue from unapproved change orders in the forecasts of one of the projects, including change orders that had not yet been submitted to, or had already been rejected by, the customer.
The SEC’s press release stressed the importance of appropriate estimates — and the SEC’s continued focus on controls and recordkeeping.
“Dependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on,” said Carolyn Welshhans, Associate Director in the Division of Enforcement. “We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Check out the latest edition of our “Timely Takes” Podcast featuring John’s discussion with J.T. Ho, partner at Orrick, Herrington & Sutcliffe LLP. John and J.T. are planning on J.T.’s “Fast Five” being a new monthly podcast feature, which piggybacks off of a brief monthly email that J.T. prepares for clients. I think our members will love this format since it gives a quick take on timely securities law and corporate governance hot topics. In this 9-minute podcast, John and J.T. discuss varied and timely topics, including:
– The SEC’s Cybersecurity Disclosure Rules – Recent Changes to the Delaware General Corporation Law
– Potential Advantages of Self-Reporting to the SEC
– Board Oversight of Corporate Political Statements
– Topics to Watch Over the Coming Months
If you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share, we’d love to hear from you. Just shoot us an email at mervine@ccrcorp.com or john@thecorporatecounsel.net.
On September 19, at our “2nd Annual Practical ESG Conference” — which you can attend virtually as a standalone event or bundle with our PDEC Conferences and save — our very own Dave Lynn and Lawrence Heim and an amazing group of ESG practitioners from diverse backgrounds will deliver usable, practical guidance on the hottest ESG topics, in a candid and conversational format.
On September 20-21, we’ll help you prepare for the upcoming proxy season with the “2023 Proxy Disclosure Conference.” This conference is timed to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity.
On September 22, we’ll discuss all things executive compensation at the “20th Annual Executive Compensation Conference.” A wide range of panelists will address hot topics in executive compensation today — from ESG metrics to clawbacks.
Here’s the full agenda – and all of our experienced speakers. It is not too late to register! You can sign up online, by emailing sales@ccrcorp.com, or by calling 1-800-737-1271. You can still bundle the Conferences together to get a discounted rate.
If you have already signed up to attend our Conferences next week, please be on the lookout for an email from info@ccrcorp.com with instructions for logging on to the Conference platform.
Next week, you will receive additional attendee communications with your unique direct link to access the Conferences for which you have registered. We will be sending the direct access link the day before the applicable event. So, for the “2nd Annual Practical ESG Conference,” attendees will receive their direct access link on Monday, September 18th, and attendees will receive the direct access link for the “Proxy Disclosure & 20th Annual Executive Compensation Conferences” on Tuesday, September 19th.
If you have friends who aren’t already members but would appreciate our curated content — including checklists, handbooks, filtered content libraries/practice areas, quick-take podcasts, timely webcasts & transcripts, benchmarking surveys, blogs on key updates, and our community Q&A forums — we are offering a referral program that gets you 15% off any new CCRcorp product or membership and your friend 15% off their first CCRcorp purchase.
Since they’re right around the corner, keep in mind that you can use this promotional discount on our “Proxy Disclosure & 20th Annual Executive Compensation Conferences” and “2nd Annual Practical ESG Conference.” With potential implications of the SEC’s ambitious regulatory agenda continuing to loom large in the minds of public companies & their advisors, you can’t afford to miss them this year! Do yourself (and your friends) a favor and take advantage of this offer! Email sales@ccrcorp.com today – or call 1-800-737-1271.
We got word last week that NYSE sent an email blast to listed issuers regarding the new clawbacks listing rules. After reminding companies that issuers must adopt a Dodd-Frank clawback policy no later than December 1st, NYSE noted that it is also requiring each listed issuer to confirm via Listing Manager either that it adopted a policy by that date or that it is relying on an applicable exemption. NYSE plans to require such confirmation for initial listing applications as well for companies applying to list their securities on or after October 2nd. The email noted a subsequent communication with more details would be sent in the fourth quarter.
On a related note, at the “Dialogue with the Director” session on Friday at the ABA’s Business Law Section Fall Meeting, Corp Fin Director Erik Gerding was asked who should field interpretive questions regarding Dodd-Frank clawback requirements — the SEC or the stock exchanges. While “both” may not be the answer we wanted to hear, Erik’s suggestion — that interpretive questions first be directed to the relevant stock exchange and then its response be conveyed to the Commission — makes a lot of sense.
Also during the “Dialogue with the Director” session on Friday at the ABA’s Business Law Section Fall Meeting, Jay Knight, Chair of the Federal Regulation of Securities Committee, asked Corp Fin Director Erik Gerding about the SEC’s current areas of focus. While Erik noted that his discussion was not exhaustive, one of the topics he highlighted was disclosures by bank issuers, stating that the SEC was looking at the following areas in particular:
– Liquidity disclosures under Item 303 of Regulation S-K, including liquidity risks, available sources, key provisions or parameters of those sources and actions taken to ensure liquidity
– Interest rate risk, including whether interest rate sensitivity disclosures under Item 305 of Regulation S-K would benefit from additional explanation of the key assumptions underlying that disclosure
The WSJ previewed these topics in June, noting that this was an area of focus for SEC comments on registration statements filed by regional banks after the bank failures we saw this spring.
