Our updated SEC Compliance & Governance Accelerator — a comprehensive training program for those who need to quickly get up to speed on various governance and SEC reporting topics — is now available! This practical guide is available without charge to members of TheCorporateCounsel.net. It features over 100 resources comprised of chapters from our handbooks, checklists, pithy podcasts & over 200 FAQs from our “SEC Compliance & Governance Accelerator Treatise” for a well-rounded, multi-media experience for audio and visual learners alike. I often encountered folks looking for this sort of training in my practice, including:
– Anyone new to public company corporate work, reporting/compliance or board governance
– Folks in in-house corporate counsel roles at companies preparing to go public
– Anyone new to a public company or board-facing role — including your financial reporting or HR colleagues
– Junior lawyers in law firm corporate departments that represent public company clients
– Legal specialists who represent public companies in their area (e.g., litigation, IP, regulatory) and want to understand the basics
– Last – but by no means least! – experienced lawyers looking for a quick refresher on compliance or governance topics
If this is your first time working on a proxy, we have a podcast and FAQs on proxy season basics. If you’ve never been through the SEC comment letter process, we have a podcast and FAQs on that too. To quickly navigate to a particular topic, refer to the Forward and Detailed Table of Contents of our “SEC Compliance & Governance Accelerator Treatise.”
Last week, ISS announced the results of its 2023 benchmark policy survey. ISS received responses from 239 investors and 216 non-investors, including public companies, board members and their advisors.
The results summary details a number of key findings on E&S matters. One question sought to address whether investors would give companies a pass for reducing their transparency on E&S topics in light of recent ESG backlash. Investors overwhelmingly (85%) responded that the risk of reduced transparency is greater than the risk of political backlash and that they would not tolerate reduced disclosure, even on politically sensitive topics. 49% of non-investor respondents agreed!
On the governance side, ISS sought feedback from respondents on its strict test for professional services relationships:
Under ISS’ current classification of directors, a director who provides professional services to the company or an affiliate in excess of a certain amount (currently $10,000 per year in the U.S.), or who is a partner, employee, or controlling shareholder of an organization that provides such services, is considered to be nonindependent. A director is also classified as non-independent if his or her immediate family member meets any of those criteria. However, a company’s audit firm or law firm may employ thousands of people in numerous offices, many of whom may not have any influence over the services provided to the company.
When asked if it was appropriate to treat a director as non-independent due to a family member’s employment by such a firm, just over half of investor respondents said that it was appropriate. About one-quarter of investor respondents said that the policy was appropriate but that the threshold for considering payments for professional services to be “de minimis” should be increased. In contrast, nearly 40 percent of Investor respondents said that a director’s or his or her family member’s employment by a professional services firm does not raise concerns as long as the director or family member is not involved in the provision of services to the company and does not supervise employees who are involved.
The results will be used to formulate the proxy advisor’s voting policies, which will be released in draft form in November — followed by a public open comment period for all interested market participants — and then finalized in late November or early December. The final policies will apply to shareholder meetings on or after February 1, 2024.
Now’s a good time to check in on your process for providing advance notice to your exchange of the public release of the material information. As described in this Loeb & Loeb Quick Takes blog, Nasdaq recently added FAQ Number 1864 containing guidance on completing the electronic disclosure form to provide the required advance notice to Nasdaq’s MarketWatch Department when material non-public information is being announced. The form requires that users select one or more “news categories” that the announcement fits into, and the FAQ provides examples to clarify which categories should be selected in various circumstances. Many are self-evident, but here are some that were not so clear:
– Non-reliance on previously issued financial results should be identified as “Earnings/Quarterly or Annual Reports” – Events involving milestone payments, material collaborations and/or partnerships should be identified as “FDA-Related/Clinical Trials/Study Results” – Regaining compliance with Nasdaq’s listing requirements should be identified as “Listing Deficiency or Compliance Notices”
There is also the option to select “Other” for anything that doesn’t fit the listed categories, and I likely would have done that for some of these. While selecting the wrong category may not be particularly consequential, for Nasdaq companies this might be a good excuse to check in with the person or people responsible for submitting your MarketWatch notices to make sure they know the types of announcements that require 10-minute prior notice per IM-5250-1 and that they are indeed providing it in those circumstances. The expansive list is sometimes surprising to the folks responsible, and the process may run like clockwork for earnings releases, but not always for other 8-K events.
Check out John’s latest “Timely Takes” podcast featuring a discussion with Skadden’s Brian Breheny and William E. Ridgway on the SEC’s cyber disclosure rules. In this 20-minute podcast, Brian & William addressed the following topics:
How are the SEC’s cyber disclosure rules likely to influence cyber risk management practices?
How will the new rules influence the relationship between the cybersecurity and SEC reporting functions?
What potential changes to disclosure controls and procedures should companies consider?
Will the new disclosure requirements about the processes for managing cyber threats result in changes to those processes?
How will the rules influence the way that boards exercise their cybersecurity oversight responsibilities?
If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, please reach out to me or John! You can email us at mervine@ccrcorp.com or john@thecorporatecounsel.net.
AI has been especially prevalent in the news this week, following the Executive Order that President Biden issued on Monday (here’s the fact sheet). Among other things, the order gives broad leeway to federal agencies to set standards for the use of AI (e.g., the NIST framework) and for the protection of individual privacy. It’s not a stretch to think that this developing issue is on the SEC’s radar.
With that, here’s a good recap of the recent Securities Enforcement Forum from Holly Carr, who spent a decade in the SEC’s Enforcement Division and is now at BDO. On top of Dave’s recent reminder about cyber risks, this jumped out at me on the topic of AI:
On AI, companies should be assessing how not just their use of AI but how the use of AI by others may expose their business to new or increased risks. For example, how are customers or vendors using AI that may impact your organizations’ risk profile.
As John noted a few weeks ago, we’re continuing to post practical governance & disclosure resources in our “Artificial Intelligence” Practice Area. And on the topic of SEC Enforcement, make sure to mark your calendars for our webcast – “SEC Enforcement: Priorities and Trends” – which is less than two weeks away, on November 15th at 2pm Eastern. We’ll hear from Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe about the Division’s priorities, the latest developments on “gatekeeper” scrutiny, the pros & cons of voluntary reporting & cooperation, and more. CLE credit is available!
I don’t know if you’ve heard, but FTX founder Sam Bankman-Fried has been on trial for the past month. Last night, the jury returned a guilty verdict on all counts, after deliberating for only a few hours. Sentencing is scheduled for March. Here’s more detail from CBS News:
The 31-year-old former cryptocurrency billionaire was convicted of two counts of wire fraud conspiracy, two counts of wire fraud, and one count of conspiracy to commit money laundering, each of which carries a maximum sentence of 20 years in prison. He was also convicted of conspiracy to commit commodities fraud and conspiracy to commit securities fraud, which each carry a five-year maximum sentence.
As my kindergartner would say: “Bruh, I can’t even.” The big verdict caps off a busy few weeks of crypto regulatory news. On the SEC front:
2. “Crypto Mom” Hester Peirce published a dissent on the Commission’s enforcement action against LBRY
3. The SEC decided not to appeal the Grayscale ruling, which may open the door to a Bitcoin ETF
Meanwhile, states are also getting in on the action:
4. New York AG Letita James is accusing the Winklevoss twins (sorry, the Winklevii) of perpetuating fraud through their crypto exchange & crypto “lending platform”
5. California Governor Gavin Newsom signed a law to create a regulatory framework for crypto (following NY’s lead)
This is not an exhaustive list of developments! I am not sure that there is a “big picture” takeaway other than that fraud is still illegal, and as someone mostly observing from the sidelines, I’m also not sure whether these items collectively show that we are moving closer to a world of acceptable digital assets or further away.
In the latest 22-minute episode of Women Governance Trailblazers, Courtney Kamlet & I were delighted to interview Cigdem Oktem, who leads EY’s Center for Board Matters in the US Central Region. She launched EY’s regional approach to help boards and C-suite executives benefit from the practices of their peers and CBM insights. Cigdem is a sought-after speaker and facilitator for board and CEO events around the country and is particularly skilled at using the power of storytelling to help leaders ask the right questions. Listen to hear:
1. Cigdem’s career journey in corporate governance & finance – including her roles as a CFO and as an advisor to boards and audit committees.
2. The biggest governance changes that are happening right now.
3. Tips on sharing information and influencing board behavior.
4. What’s next for the EY Center for Board Matters.
5. What Cigdem thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Yesterday’s blog betrayed that I had resigned myself to parsing through exhibits with daily share repurchase data and explaining the reasons for share repurchase programs, under rules adopted by the SEC in May. I stand by the notion of having the mechanics of a share repurchase be consistent with the authorizing board resolution (not a new concept and something you’re probably already doing), but in a stroke of luck, the Fifth Circuit has stepped in to say that we may not need to publicly disclose the details after all. A 3-judge panel issued this opinion – which holds that the SEC acted arbitrarily and capriciously in adopting the final rule, in violation of the Administrative Procedure Act.
The ruling was a partial win for the U.S. Chamber of Commerce, which – as discussed in our May webcast – had challenged the rule on multiple grounds. The court determined that the rule doesn’t violate the First Amendment by impermissibly compelling speech, and that the SEC’s 45-day comment period for this rule was adequate. The problem, in the court’s view, was that the SEC didn’t consider the Chamber’s comments on the rule, which suggested that the Commission quantify the costs & benefits of the proposed rule, even though the Chamber had provided the SEC with new data during the comment period that would have allowed it to do so. From the opinion:
The SEC — by continuing to insist that the rule’s economic effects are unquantifiable in spite of petitioners’ suggestions to the contrary — has failed to demonstrate that its conclusion that the proposed rule “promote[s] efficiency, competition, and capital formation” is “the product of reasoned decisionmaking.”
Additionally, the court went on to say that the supposed benefits of the new disclosure requirements don’t hold water, because the SEC hasn’t shown that opportunistic or improperly motivated buybacks are a genuine problem. According to the court, “That error permeates — and therefore infects — the entire rule.”
Hold off on deleting all your notes on the new requirements, though, because the SEC has 30 days to try to fix the defects in the rule and substantiate its decision to adopt it. My understanding is that the Commission could potentially ask for an extension – or appeal the ruling – but those avenues could be limited since the compliance date is quickly approaching. If the rule is actually vacated following expiration of this remand period, the SEC may be able to appeal that holding. The WSJ noted:
The ruling highlights the legal risks federal agencies face at a time of growing judicial scrutiny of their decisions. SEC Chair Gary Gensler is pushing an aggressive regulatory agenda that has angered American corporations and Wall Street, prompting groups such as the Chamber to challenge several rules in court.
This feels a little like when the SEC’s conflict minerals rule went on life support and nobody quite knew what would be required. The difference is that conflict minerals was struck down on First Amendment grounds, so it continued to exist, but on a much narrower basis. Whereas, if the SEC’s adoption of the share repurchase rule was faulty under the APA – and that’s not corrected – the entire rule would be vacated. We’ll see what the next 30 days bring.
In its opinion remanding the SEC’s share repurchase rule, the Fifth Circuit panel noted that the Chamber had submitted data for the Commission to consider. The Chamber did that by way of multiple comment letters that are available on the SEC’s website. One of the newer studies that the Chamber cited to was this one, from a quartet of European professors and part of the Finance Working Paper Series for the European Corporate Governance Institute, which was also summarized last year in this HLS blog. Here’s an excerpt:
The major insight of our paper is that both the timing of buyback programs and the timing of equity compensation, i.e., the granting, vesting, and selling of equity, are largely determined by the corporate calendar. We define the corporate calendar as the firm’s schedule of financial events and news releases throughout its fiscal year, such as blackout periods and earnings announcements. We argue that this calendar determines when firms implement decisions about buyback programs and equity compensation and when firms and CEOs can execute trades in the open market.
As a consequence, share repurchases and equity compensation are positively correlated. However, this correlation disappears once we account for the corporate calendar. Therefore, we conclude that the correlation between share repurchases and equity compensation is spurious and should not be interpreted causally.
Consistent with this insight, we do not find systematic evidence of price manipulation when the CEO’s equity vests or when the CEO sells her vested equity. In conclusion, we find no evidence to support the claim that CEOs systematically misuse share repurchases at the expense of shareholders.
I’m looking forward to people smarter than me describing how they’ve sorted through all of this information.
Yesterday, the SEC issued an order to approve Nasdaq’s proposal to require a listed company conducting a reverse stock split to:
– Notify Nasdaq about certain details of the reverse stock split at least 5 business days (no later than noon ET) prior to the anticipated market effective date, and
– Make public disclosure about the reverse stock split at least 2 business days (no later than noon ET) prior to the anticipated market effective date.
These changes will be reflected in new Rules 5250(b)(4) and 5250(e)(7), new IM 5250-3, and amended Rule 5250(b)(1) – so once they’re posted to the rulebook, read those for more detail. The Company Event Notification Form will also be updated to reflect the information that a company must disclose to the Exchange about a reverse split. Here’s what happens if you don’t comply:
Additionally, if a company takes legal action to effect a reverse stock split notwithstanding its failure to timely satisfy these requirements, or provides incomplete or inaccurate information about the timing or ratio of the reverse stock split in its public disclosure, Nasdaq will halt the stock in accordance with the procedure set forth in Nasdaq Equity 4, Rule 4120, that provides Nasdaq with the authority to halt trading to permit the dissemination of material news.
