In 2020, the SEC issued a 7-page interpretive release providing guidance on disclosure of key performance indicators in MD&A. Among other things, the guidance noted that disclosure of certain key metrics may be required under Item 303, but said that when companies disclose such metrics, they should also consider whether additional disclosures are necessary. The release also highlighted the obligation to maintain appropriate disclosure controls and procedures when disclosing KPI metrics. Since that time, KPI disclosures have proven to be a popular topic for Staff comments – and the occasional enforcement proceeding.
One of the big reasons that KPIs attract a lot of attention from the SEC is that companies love to use them and talk about them – but a recent FEI Daily blog says that they may be overdoing it:
Key Performance Indicators (KPIs) are present at nearly every level of the leading U.S. corporations—from their HR departments, to finance, to marketing, to sales. On paper, KPIs serve a very useful function: they quantify performance over a period of time, giving teams targets to hit, establishing milestones in a company’s journey toward its goals, and providing leaders with insights that can steer the ship toward greater efficiency and profitability.
However, in the age of advanced analytics, where organizations rush to incorporate the latest in analytics into aging infrastructures, companies keep building up their list of KPIs while losing sight of the big picture. Ironically, many companies that try to incorporate more data just end up with more reports that aren’t used and the data itself becomes less useful. Imagine someone intending to knit a sweater but instead starts tunnel visioning on making more and more loops, without connecting them back to the already-woven fabric. The loops become an end in themselves. This is what organizations are doing by over-indexing on KPIs—making the means the focus, not the end. Companies need to think beyond the “loops” to connect with the fabric of the bigger picture.
It strikes me that this is something that companies should keep in mind and consider whether there’s a need to cut through the KPI underbrush to determine what performance metrics should be disclosed in SEC filings & investor communications. That’s going to require sorting out the KPIs that really matter from the ones that are less relevant or even potentially misleading.
One of the SEC’s objectives in issuing its KPI release was to encourage companies to make their MD&A disclosure more transparent. But if you’ve got a bunch of random, non-key KPIs working their way through the company, that’s a recipe for the opposite of transparency – muddy & potentially problematic disclosure in your SEC filings.
Speaking of transparency, Labrador recently announced the winners of its 5th annual disclosure transparency awards. Here’s an excerpt from its press release:
PayPal, Target and State Street are among companies awarded top honors in the fifth annual U.S. Transparency Awards announced today by Labrador, a leading global communications firm specializing in transparent investor and stakeholder communications. The rankings compare the efficacy of corporate disclosure documents across the S&P 250 – the nation’s largest companies based on market capitalization – and are independently determined through an evaluation of all corporate disclosure documents.
Earlier this year, Labrador retained our friend & former colleague Broc Romanek to lead the charge on its disclosure transparency initiative. Broc posted more info about the awards and the winners in various categories on Labrador’s RealTransparentDisclosure.com blog.
Since I hosted our Proxy Disclosure Conference yesterday and spent all day in a coat & tie, I was hoping that somebody could finally get Broc into corporate attire for the awards ceremony. But when I saw his 8-minute video announcing the winners, I was disappointed to see that he dodged the bullet – although he looked stylish, he opted for the t-shirt with sport jacket. I sincerely doubt that Broc’s worn a tie since the last time he hosted our conferences.
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: If you registered to attend the Conference through CCRcorp, you will be able to access the conference archives on the conference platform next week, and unedited transcripts will be available beginning about 1-2 weeks after the event. If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP. Archives and transcripts will be available on-demand until September 20, 2024, so they’ll be available for you to reference as you navigate challenging proxy season issues well after the live Conferences have concluded.
– How to Earn CLE for Live Sessions: We are applying for up to 16 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these CLE FAQs carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts approximately every 20-30 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– New this Year! On-Demand CLE: We will be offering on-demand CLE credit for the session replays, in states where that is available. There are some nuances to receiving that credit, so make sure to check out the on-demand CLE FAQs that follow the general CLE FAQs in order to be able to take advantage of that.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our gold sponsors for the Proxy Disclosure & 20th Annual Executive Compensation Conference are Fredrikson and Morrison & Foerster, our silver sponsor is Kirkland & Ellis, and our media partner is Newsfile. Please visit their pages in our virtual exhibit hall!
It is not too late to register for our Conferences today! You can sign up for today’s “2023 Proxy Disclosure Conference” and our “20th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. If you miss these conferences or our “2023 Practical ESG Conference,” you can purchase access to the archives (and, for the “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences,” may be able to earn CLE credit for watching on-demand sessions as well). Just email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that.
Pending California legislation imposing climate disclosure requirements on companies doing business in the Golden State was a topic of discussion at yesterday’s “2023 Practical ESG Conference.” Troutman Sanders’ Brinkley Dickerson reports that this legislation isn’t going to be “pending” for much longer:
Over this past weekend California’s Governor Newsom indicated that he would sign SB 253 and SB 261. SB 253, when fully implemented with rules, will require any entity with $1 billion or more in revenue (anywhere) and that “does business” in California to file annual reports covering Scope 1 and Scope 2 emissions (wherever they occur) and, ultimately, Scope 3 emissions (wherever they occur).
The reporting requirements will be effective in 2026 for 2025 Scope 1 and Scope 2 emissions, and 2027 for Scope 3 emissions. Assurance reports will be required for Scope 1 and Scope 2 emissions at the limited assurance level beginning in in 2026 and at the reasonable assurance level beginning in 2030. Assurance reports will be required for Scope 3 emissions at the limited assurance level beginning in 2030.
SB 261, when fully implemented with rules, will require any entity with $500 million or more in revenue (anywhere) and that does business in California to prepare a biennial report disclosing (i) climate-related financial risk (using the TCFD approach) and (ii) measures adopted to “reduce and adapt to climate-related financial risk disclosed” under clause (i).
The implementing rules will be critical as SB 253 does not contemplate consolidate reporting, while SB 261 does.
While both bills are likely to be challenged, the challenges will be more difficult than those to the SEC climate disclosure rules (if and when finalized) given the clear statutory authority (which was the prevailing challenge in the Supreme Court’s EPA vs. West Virginia opinion) and the recent cases narrowing preemption by the Commerce Clause. It is unclear what impact, if any, the California legislation will have on the SEC rulemaking.
Check out our latest “Timely Takes” podcast featuring a discussion with Barnes & Thornburg’s Jay Knight on the PCAOB’s proposed amendments to its Noncompliance with Laws and Regulations Auditing Standard. In this 20-minute podcast, Jay addressed the following topics:
1. Overview of the PCAOB’s proposed Non-Compliance with Laws and Regulations (NOCLAR) Auditing Standard and how it differs from the current standard
2. The most significant concerns about the proposed NOCLAR Standard from a lawyer’s perspective
3. Implications for audit committees and their advisers
4. Implications for the relationship between management and the outside auditors
Be sure to pay a visit to Barnes & Thornburg’s new “Practical Securities Law Blog,” which we just added to our blog roll. If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Practical ESG Agenda” tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Conference attendees will be able to access the archives of the “1st Annual Practical ESG Conference” on PracticalESG.com via a special link that we will email to conference attendees about a week after the event. Unedited transcripts also will be available via that link, beginning about 1-2 weeks after the event.
– Thanks To Our Sponsor! Our sponsor, Morrison Foerster, helped make our “2023 Practical ESG Conference” possible, and we are proud and grateful to have their support. Please visit their page!
It is not too late to register for our Conferences today! You can sign up for today’s “2023 Practical ESG Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. You can still sign up online for our “2023 Proxy Disclosure Conference” & “20th Annual Executive Compensation Disclosure Conference” (with the “2023 Virtual Conferences” drop-down, and the “PDEC” options) – or you can register via email or phone. Remember, you can also still bundle the conferences together to get a discounted rate!
We’re coming to the end of the SEC’s fiscal year, and that’s traditionally been a time when we’ve seen a lot of high-profile activity on the enforcement front. That looks like it may be the case this year, and it also looks like related party transaction disclosure is high on the list of the Division of Enforcement’s priorities. Last week, Meredith blogged about a recent RPT enforcement action and the SEC brought another settled enforcement action yesterday, this time targeting alleged shortcomings in related party transactions disclosure by Lyft. This excerpt from the SEC’s press release announcing the settlement summarizes the conduct alleged in its order:
According to the SEC’s order, prior to Lyft’s IPO in March 2019, a Lyft board director arranged for a shareholder to sell its shares to a special purpose vehicle (“SPV”) set up by an investment adviser affiliated with the same director. The director then contacted an investor interested in purchasing the shares through the SPV. According to the SEC’s order, Lyft, which approved the sale and secured a number of terms in the contract, was a participant in the transaction, and the director was a related person by virtue of his position and because he received millions of dollars in compensation from the investment adviser for his role in structuring and negotiating the deal. Lyft failed to disclose this information regarding the sale in its Form 10-K for 2019. The SEC’s order finds that the director left the Board at the time of the transaction.
Without admitting or denying the SEC’s allegations, Lyft consented to an order requiring it to cease and desist from committing or causing any future violations of Section 13(a) of the Exchange Act or Rule 13a-1 thereunder. The company also agreed to pay a $10,000,000(!) civil penalty.
The action provides a reminder that even if a transaction doesn’t involve payments between a company and a related party, disclosure may still be required. That’s because Item 404(a) requires a description of transactions since the beginning of the registrant’s last fiscal year in excess of $120,000 in which it was or is to be a participant, and in which a related person had or will have a direct or indirect material interest.
The SEC’s position in this enforcement action makes it clear that Lyft’s involvement in approving and negotiating some of the terms of the transaction was sufficient to characterize the company as a “participant” in it. This excerpt from p. 21 of our “Related Party Transactions Disclosure Handbook” provides additional color on the participation concept & some of the challenges it presents:
Being a participant encompasses situations where the company benefits from a transaction but is not technically a contractual party to the transaction. In response to concerns that the concept of a “participant” might be too broad and far-reaching, the SEC offered the following example of a case where disclosure might be required even if the company is not a contractual party: “[d]isclosure would be required if a company benefits from a transaction with a related person that the company has arranged and in which it participates, notwithstanding the fact that it is not a party to the contract.” See the 2006 Adopting Release at footnote 418.
This loose boundary may be problematic to monitor since it carries with it the possibility that disclosure could be required in a situation where the company does not have a “material interest” (as would be required for the related person) in the transaction. Presumably, the company would be aware of the transaction if it had a hand in “arranging” the transaction, but there may be other situations that are not as evident to those tasked with tracking potentially disclosable transactions.
We also have a bunch of Q&As beginning on p. 48 of the Handbook that address specific situations where “participation” is an issue that you may find helpful. The bottom line is that Item 404 of Reg S-K is designed to cast a very wide net, and the SEC expects companies to be mindful of that fact when preparing disclosure documents. In her blog last week, Meredith suggested that it may be time for companies to consider refreshing their disclosure controls and procedures for related party transactions. That seems like an even better idea this week.
Earlier this year, Liz blogged about a cert petition seeking clarification from the SCOTUS of the extent to which the failure to comply with the MD&A line-item disclosure requirements set forth in Item 303 of Reg S-K can serve as the basis for a securities fraud claim. That’s an issue that the circuits are split on, and earlier this month, a federal district judge in the Northern District of Illinois threw another log on this particular fire with his opinion in Phoenix Ins. Co. v. ATI Physical Therapy, (ND Ill.; 9/23). This excerpt from a recent Jim Hamilton blog on the decision summaries the Court’s analysis:
The Seventh Circuit has not yet decided whether a Section 10(b) or 14(a) claim can be premised on a violation of Item 303. In the Second Circuit, “positive law” (statutes or regulations, like Item 303) can give rise to an affirmative duty to disclose under Exchange Act Section 10(b) or 14(a). The Ninth Circuit, though, held otherwise, reasoning that Item 303’s disclosure requirement varies from the Basic test for materiality.
In the Illinois district court’s view, the Ninth Circuit conflated the distinct concepts of duty to disclose and materiality. The district court thus adopted the reasoning of the Second Circuit that failure to comply with Item 303 can give rise to Section 10(b) fraud liability if the omission is material under Basic and the other elements of the securities fraud claim are established. “That reasoning, which recognizes the difference between the legal concepts of duty to disclose and materiality, makes sense,” the Illinois court wrote. “It also likely—though not definitely—squares with an earlier case that the Ninth and Second Circuits both cite.”
The Court also held that non-compliance with Item 303 can serve as the basis of a claim under Rule 14a-9, which prohibits false or misleading statements in proxy materials, provided that Basic’s materiality standard is satisfied.
Although the Northern District of Illinois held that non-compliance with Item 303 can serve as a basis for a Rule 14a-9 claim, it’s becoming increasingly difficult to find a court that will entertain such a claimt. Earlier this year, in Lee v. Fisher, the 9th Cir. upheld a forum selection bylaw at Gap that designated the Delaware Court of Chancery as “the sole and exclusive forum for . . . any derivative action or proceeding brought on behalf of the Corporation.” Because Exchange Act claims can only be brought in federal court, that ruling had the effect of precluding stockholders in Delaware corporations with that exclusive forum language from bringing derivative Rule 14a-9 claims.
Now, Prof. Ann Lipton has cited a recent decision by a Texas federal magistrate that tightens the screws on Section 14(a) claims even more. Here’s an excerpt from her Twitter thread on the decision:
Shareholders of an acquiring company sued under Section 14, claiming the proxy statement misled them into approving the merger. A federal magistrate court just said Delaware law governs the direct/derivative distinction, though the injury is direct, the damages from a stock price drop are derivative, and therefore, plaintiff cannot bring claims directly. Edwards v. McDermott, 4:18-cv-04330 SD Tex.
This is the next step in allowing Delaware law to supersede federal securities law. Previously, CA9 held that derivative 14(a) claims – – can functionally be waived in bylaws, bc they really shouldn’t exist at all. Which means, if this decision stands, we’re really cutting off most avenues for Section 14 claims, outside the target-side merger context.
The bottom line is that the SCOTUS has done everything but formally overrule its 1964 decision in J.I. Case v. Borak finding an implied private right of action under Section 14(a), and it looks like the federal courts are determined to finish the job.