February 19, 2021

2021 Risks: “Business Interruption” Tops the List

Allianz has issued its annual “risk barometer” – which identifies the top 10 risks for the upcoming year based on a survey of nearly 2800 brokers, underwriters, senior managers and claims experts in the corporate insurance sector. It’s always a helpful read for identifying macro trends and issue spotting for your risk factors, although of course you need to tailor those to explain how the macro factors specifically affect your business.

“Business interruption” has been the top risk for 5 of the last 6 years – last year was the exception, with people worrying that cybersecurity would be the thing that kept us up at night in 2020. For 2021, “business interruption” is back at the top – which seems prescient in light of this week’s power grid failure in Texas and the SEC’s informal reminders to companies that they should have contingency plans to be able to carry on operations during emergencies. The risk of a pandemic outbreak is #2. Cyber incidents are hanging in there at #3 and are considered a potential “Black Swan.”

Here’s an excerpt:

When asked which change caused by the pandemic will most impact businesses, Allianz Risk Barometer respondents cited the acceleration towards greater digitalization, followed by more remote working, growth in the number of insolvencies, restrictions on travel/less business travel and increasing cyber risk. All these consequences will influence business interruption risks in the coming months and years.

The knock-on effects of the pandemic can also be seen further down the rankings in this year’s Risk Barometer. A number of the climbers in 2021 – such as market developments, macroeconomic developments and political risks and violence – are in large part a consequence of the coronavirus outbreak. For example, the pandemic was accompanied by civil unrest in the US related to the Black Lives Matter movement, while anti-government protest movements simmer in parts of Latin America, Middle East and Asia, driven by inequality and a lack of democracy. Rising insolvency rates could also affect supply chains.

All that said, only 3% of survey participants were worried about a pandemic at this time last year. So, one of the main takeaways I gleaned this year was that it’s pretty difficult to predict the “next big thing.”

Transitioning to “Non-Accelerated” Filer Status: What Year Do You Use for the Revenue Test?

We’ve been fielding a ton of questions from members in our Q&A Forum these past few weeks. Here’s one that could affect your 10-K deadline (#10,573):

Company is currently an accelerated filer and a smaller reporting company. As of June 30, 2020, their public float was between 75 and 250 million (approx. 100 million). Its FY 2019 revenue was above 100 million; however, its FY 2020 revenue is below 100 million.

My question is for determining whether it transitions to non-accelerated status, should company use the FY 2019 or FY 2020 revenue for the SRC revenue test exception to accelerated filer status? The rule says it is the revenue as of the most recently completed fiscal year but do not know if that determination is made as of June 30 like with public float or now. If company uses FY 2019, then they would still be an accelerated filer but using FY 2020 I believe they would be a non-accelerated filer.

John responded:

Under Rule 12b-2, accelerated filer status is assessed at the end of the issuer’s fiscal year, and the applicable SRC revenue test is based on the most recently completed fiscal year for which financial statements are available. Since the 2020 financial statements won’t be available at the time when the assessment is made, I believe that you will continue to look at the 2019 financials in determining whether the issuer remains an accelerated filer during 2021.

I think that position is also consistent with footnote 149 of the adopting release, which indicates that a company will know of any change in its SRC or accelerated filer status for the upcoming year by the last day of its second fiscal quarter. Here’s an excerpt:

“Public float for both SRC status and accelerated and large accelerated filer status is measured on the last business day of the issuer’s most recently completed second fiscal quarter, and revenue for purposes of determining SRC status is measured based on annual revenues for the most recent fiscal year completed before the last business day of the second fiscal quarter. Therefore, an issuer will be aware of any change in SRC status or accelerated or large accelerated filer status as of that date.”

Transcript: “Conflict Minerals & Resource Extraction – Latest Form SD Developments”

We’ve posted the transcript for our recent webcast – “Conflict Minerals & Resource Extraction: Latest Form SD Developments” – which covered these topics:

1. Rule Status & Current SEC Guidance

2. Observations From 2020 Form SD Filings

3. How Disclosure Should Be Changed for 2020

4. NGO Expectations & Surveys

5. Resource Extraction: Payment Disclosures

Liz Dunshee

February 18, 2021

Corp Fin’s “No-Action” Page Gets a Makeover!

The SEC has redesigned Corp Fin’s Rule 14-8 no-action page – and the layout is very user-friendly for those of us who spend proxy season monitoring incoming requests & responses. The old page was more spread out in narrative form, whereas this new version organizes into easy-to-read boxes the no-action response chart, incoming requests and final materials for responses – as well as reference materials and info from prior seasons. Bravo!

Filing Relief for Texans: Case-By-Case, But Proceed With Caution

As a Minnesotan who relies heavily on heat & electricity during the winter months, I’ve been flabbergasted by this week’s dispatches from Texan friends & colleagues. We are keeping y’all in our thoughts and hoping your power is restored soon.

We’ve had some inquiries on whether the SEC is offering weather-related filing relief to companies located in the Lone Star State. A gracious member shared this info in our Q&A Forum (#10,619):

This is what I was told today by the SEC Staff (Office of Chief Counsel). By the way, I am in Austin and we have no water, over 48 hours no power and I am working from a phone hotspot/makeshift solar panel attached to batteries, so yes, it is truly a survivalist situation out here in Texas — I hope everyone is staying safe!

• The SEC is aware of the power grid failures/inclement weather and related challenges in Texas and wants to help issuers experiencing the effects of these challenges.

• If you are an issuer with a filing deadline that you cannot meet due to the situation in Texas, such as an 8-K or Section 16 filing, the SEC encourages you or your counsel to contact the SEC staff to make them aware of the situation (via and follow-up with a call to the staff) and you can request a date adjustment of the filing per Rule 13(b) of Regulation S-T: “If an electronic filer in good faith attempts to file a document with the Commission in a timely manner but the filing is delayed due to technical difficulties beyond the electronic filer’s control, the electronic filer may request an adjustment of the filing date of such document. The Commission, or the staff acting pursuant to delegated authority, may grant the request if it appears that such adjustment is appropriate and consistent with the public interest and the protection of investors.” The filing should be made as soon as it is practicable to file and the staff can assist the issuer in adjusting the filing date afterwards.

• For the upcoming 10-K filing deadline (March 1 for LAFs), the SEC is monitoring the situation and *may* issue more broad filing relief (as it did last year around this time at the beginning of the COVID pandemic), but they will not make that call unless there are still issues going into next week and it believes that broad relief is warranted by the situation.

• In short, they are monitoring the situation but in the time being, they are only working with issuers on a case-by-case basis.

That being said, issuers may want to be judicious about requesting relief, because it might suggest that the company does not have sufficient contingency plans to continue normal operations during emergencies such as prolonged power outages. But the SEC will work with issuers who are experiencing a hardship.

More on “Proxy Season Blog”

As we enter the height of proxy season, make sure to follow our daily posts on the “Proxy Season Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog. Here are some of the latest entries:

– Norges Urges Greater Board Gender Diversity, Focus for Engagement Meetings

– “How To’s” for Engaging with Proxy Advisors

– Virtual Shareholder Meetings: Fix For “Beneficial Owner” Admission Issues

– BMO’s ’21 Engagement Priorities: Sustainable Recovery

– Big QualityScore Changes: Ratings Now Include Info Security, Diversity & Sustainability

– Fidelity Policy Updates: “Against” Votes for Overboarding & Inadequate Gender Diversity

– Shareholder Proposals: Vanguard’s Approach

Liz Dunshee

February 17, 2021

10b5-1 Plans: Senators Urge SEC Review

As this recent Cooley blog recounts, since the Rule 10b5-1 safe harbor was adopted 21 years ago, it’s been a magnet for controversy. In the wake of trading gains realized by pharma execs when positive vaccine news came to light last fall, which were followed by remarks from outgoing SEC Chair Jay Clayton about “good corporate hygiene” for trading plans (also see this Cohen & Gresser memo), the safe harbor has been back in the spotlight.

Earlier this month, John blogged about “best practices” suggested by Glass Lewis that would promote transparency around these arrangements. People are now also talking about the “red flags” identified by this Stanford research as signs of potentially opportunistic trades. The paper caught the attention of three Democratic US Senators – who used the research as a basis for this letter to Acting SEC Chair Allison Herren Lee. In it, the lawmakers urge the SEC to reexamine its policies on Rule 10b5-1 plans to improve “transparency, enforcement and incentives.”

Specifically, the Senators note these possible remedies for “abusive” Rule 10b5-1 practices:

1. Requiring a four-to-six month “cooling off period” between adoption or amendment of a plan before trading under the plan may begin or recommence

2. Requiring public disclosure of the content of 10b5-1 plans, as well as trades that are made pursuant to such plans

3. Enforcement of existing filing deadlines – and requiring that forms disclosing 10b5-1 adoption dates are posted on Edgar

4. Enforcement of penalties when executives “benefit from short-term windfalls that don’t translate into long-term gains” – by way of modifying Exchange Act Section 16(b) to apply to 10b5-1 profits that follow disclosure of material information, if the share price falls immediately after that disclosure

The letter asks the SEC to respond by next week to a series of questions about its actions on this topic. One recommendation that the Senators didn’t pull in from the Stanford research – for now – was a disqualification of single-trade plans. The professors contend that these plans are no different than traditional limit orders – and that Rule 10b5-1 should only apply to multiple transactions spread over a certain time period.

While that recommendation might seem reasonable to people who aren’t dealing with administration of these plans, people in the trenches view it as further evidence of the “great divide” on this topic. A member wrote in with this feedback:

One recommendation that caught my eye is to disqualify single-trade plans. They say that single-trade plans aren’t different from traditional limit orders (which wouldn’t qualify for the safe harbor). I disagree. A trading plan can just set a tranche of shares to sell at a future date without specifying a price – they can be sold at whatever the market price is, which of course differs from a limit order.

My understanding of why an insider might have a single-trade plan is to diversify holdings following vesting of a large award. They know the vesting is coming up, they already hold a bunch of shares, and they want to diversify. So, they set up a trade sometime down the road, which allows the sale to happen even if there’s an unscheduled blackout and also allows them to avoid dealing with executing the trade when they’re busy with other things six months from now.

Also, we have a process with our captive broker where any limit order is automatically terminated when the trading window closes, as we don’t want it to execute during a blackout period. So for our execs, a limit order wouldn’t solve the issue of being able to trade during a blackout period – but a trading plan would.

SOX Compliance in Pandemic Times

Does it seem like everything is taking longer and requiring more planning in pandemic times? Between masking up, thorough hand-washing and navigating crowds, I’m factoring in at least an extra 30 minutes for any encounter with the outside world. Good luck buying a car or “dropping in” to fitness classes or hair salons. And if you want to mail anything, you’d better plan for at least 6 weeks of delivery time.

Well, according to this Toppan Merrill memo (pg. 2), you’re probably also going to need to allot more time to compliance processes this year. It’s taking longer to test SOX controls in the remote environment, and many of the people involved are overworked and tired. External auditors also want to be brought into the tent earlier so that they can spend more time digging through any non-routine transactions.

To maintain the rigor of compliance programs, the memo recommends spending more time on quality employee training, and revisiting the basics of your controls and documentation, to make sure everything is working. Especially if your company is suffering a revenue downturn, “minor” transactions could end up having a bigger impact than you’d typically expect.

Tomorrow’s Webcast: “Activist Profiles and Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from 2020’s activist campaigns & expectations for what the 2021 proxy season may have in store.

Bonus: If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.

Members of are able to attend this critical webcast at no charge. If not yet a member, subscribe now to get access to this program and our other practical resources. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at – or call us at 800.737.1271.

Liz Dunshee

February 16, 2021

SEC Enforcement: Powering Up

Last week, Acting SEC Chair Allison Herren Lee announced that she’s restored to senior Enforcement Staff the power to approve the issuance of Formal Orders of Investigation, which designate who can issue subpoenas in an investigation. That means that Enforcement Staffers will be able to act more quickly to subpoena documents and take sworn testimony.

This is a reversal of the policy that then-Acting Chair Mike Piwowar implemented in the early days of the Trump administration – and departure from the traditional requirement for Enforcement Staff to obtain sign-off from the Commissioners on a Formal Order of Investigation before issuing subpoenas. Former Chair Mary Shapiro first expanded the subpoena power back in 2009, in the wake of the Bernie Madoff fiasco.

Decentralizing the power to pursue enforcement actions is a sign that the pendulum is currently swinging toward the “investor protection” aspect of the SEC’s mission. This job posting suggests that the Enforcement Division also might be staffing up. We don’t know for sure that these steps will lead to a higher number of investigations – see this Jenner & Block memo for key open questions that will determine how aggressive things could get. Nevertheless, companies are unlikely to view them as a positive development.

SEC Severs Enforcement Settlements & “Bad Actor” Waivers

Also last week, Acting SEC Chair Allison Herren Lee issued this statement to reverse the Clayton-era policy of simultaneously considering enforcement settlements and requests for waivers from “bad actor” consequences – e.g., loss of WKSI status, Rule 506 eligibility and PSLRA safe harbors. Commissioners Hester Peirce and Elad Roisman followed with their own statement to object to the policy change.

The move means that waiver requests will revert to the domain of Corp Fin and the Division of Investment Management, rather than everything being negotiated by the Enforcement Division and companies being able to condition their settlement offers on the grant of a “bad actor” waiver. This Sullivan & Cromwell memo explains the three-fold impact of separating settlement & waiver conversations:

First, the change in policy signals greater skepticism on the part of the SEC with respect to granting waivers to settling entities. We expect that waivers will become more difficult to obtain and, when granted, may include additional, and potentially more burdensome, conditions.

Second, the change in policy creates increased uncertainty for entities settling with the SEC because they can no longer be guaranteed Commission review of the settlement of their enforcement matter simultaneously with their requested waivers. The impact of this change as a practical matter is unclear. If a settling party is denied a waiver and then seeks to withdraw its settlement offer, it remains to be seen whether the SEC will nevertheless proceed to seek judicial approval of the settlement in the face of such attempted withdrawal.

Third, the change in policy indicates the SEC’s intent to keep waiver discussions substantially separate from enforcement recommendations. Our understanding is that these discussions generally happen separately in any case, so we do not view this as a substantive change.

Tomorrow’s Webcast: “Private Offerings – Navigating the New Regime”

Tune in tomorrow for the webcast – “Private Offerings: Navigating the New Regime” – to hear Rob Evans of Locke Lord, Allison Handy of Perkins Coie and Richie Leisner of Trenam Law discuss the SEC’s rule amendments simplifying and harmonizing the rules governing private offerings – and how to prepare to take advantage of them.

Bonus: If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.

Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at – or call us at 800.737.1271.

Liz Dunshee

February 12, 2021

Prep Time for Potential ESG Ratings Questions

Yesterday, I blogged about how investors want to see companies enhance ESG reporting. ESG ratings are just one information source but it’s an area highlighted by investors for improvement. Some ratings firms release a “combined ESG” score at no charge and now, Refinitiv is one ratings firm taking things a step further. Recently, Refinitiv began making its ESG rating information available for free on its website and this includes sub-theme scores within each of “E”, “S” and “G” beyond just the overall combined ESG rating. Refinitiv has an extensive database – this blog post says it provides access to ESG scores on 10,000 companies.

With Refinitiv’s sub-theme scores freely available, investors and other stakeholders can find a company’s Refinitiv score for human rights, product responsibility, innovation, etc. Even if a company’s major investors don’t typically cite Refinitiv scores, with thematic scores freely available, this information could become fodder for questions during shareholder engagement meetings and it’s possible ESG ratings questions could start coming from directors, employees and other stakeholders. For example, if a company talks up its commitment to community, knowing Refinitiv’s “community” sub-theme score can be helpful and if it doesn’t seem to jive, check out whether Refinitiv has pulled accurate information to generate its score.

Dealing with ESG rating challenges can seem like climbing a never-ending hill and for companies without a chief sustainability officer, ESG ratings challenges might increase the odds that they start thinking about appointing one. Given the usual responsibilities of corporate secretaries and IR professionals, it’s hard to imagine either would have time to dive into ESG ratings to the extent needed. If other rating firms follow Refinitiv’s lead in sharing ESG thematic scores freely, anyone dealing with understanding and validating ESG rating provider data just got a whole lot more work.

A recent Paul Weiss memo discusses implications from ESG ratings and serves as a reminder of actions companies can take to protect themselves from ratings inaccuracies. As a first step, companies should actively monitor their current ESG ratings and develop an approach to engage with ESG rating agencies to ensure an accurate assessment of the company’s ESG performance. This includes confirming that ESG rating agencies are using correct data for their analysis.  In addition to Refinitiv, the memo identifies MSCI, ISS, RobecoSAM, Sustainalytics and RepRisk AG as common ESG ratings firms but also says there are at least 125 organizations providing ESG ratings and research.

Chief Sustainability Officer Focus: Doing Good or Doing Less Bad

I blogged back in December about continued growth in ESG investing and that’s another reason, among many, helping motivate companies to appoint a chief sustainability officer. Appointing a CSO is one way companies can show various stakeholders that they’re prioritizing and focused on sustainability. This INSEAD Knowledge blog notes CSOs are fast becoming a fixture and provides insight about the impact of the CSO.

The blog discusses research of 400 large US companies that found CSOs have an impact by improving a company’s sustainability record. What was interesting to me was a finding about the degree of a CSO’s impact on company engagement in “socially responsible” activities versus reducing “irresponsible” activities. Here’s an excerpt:

As expected, companies with a CSO engage in more socially responsible activities (e.g. investments to reduce carbon emissions) and fewer socially irresponsible activities (e.g. polluting the environment). Significantly, we found that CSO presence has a greater effect on companies ‘doing less bad’ than ‘doing more good.’  This effect is particularly pronounced in companies in so-called “sin” or culpable industries like tobacco, and, notably, in companies with a board committee for sustainability.

The researchers attribute this to more condemnation companies would likely receive it they were found to have polluted a river than the goodwill they would earn from granting more generous sick leave. The blog also says that they’ve found ‘doing good’ pays and they hope the study’s findings spur companies to design CSO contracts to incentivize the CSO to channel more resources to socially responsible activities even while striving to reduce those that are irresponsible.

January-February Issue of “The Corporate Counsel” – New Podcast!

The January-February Issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment.  The issue includes articles on:

– Virtual Reality: Investors Want More from 2021 Virtual Meetings

– Form 10-K Tidbit: Can You Drop Rule 3-09 Financial Statements?

– A Form 8-K Pitfall: Fallout from Changes to Section 162(m)

– Wither The Integration Doctrine? A New Approach Dawns this Spring

For those who haven’t previously subscribed to the newsletter, you may not realize what a wealth of information these publications provide. That’s part of the reason our intrepid editors, Dave Lynn & John Jenkins, also got together to tape this 28-minute podcast about the latest issue. The podcast is available to all members. Check it out!

– Lynn Jokela

February 11, 2021

Podcast: Inside Track on Veeva Systems’ Conversion to a Public Benefit Corporation

A few weeks ago, I blogged about shareholders overwhelmingly voting to approve Veeva Systems recent conversion to public benefit corporation. For more on that story, Liz talks with Meaghan Nelson, Veeva Systems’ Associate General Counsel and Assistant Corporate Secretary in a new 19-minute podcast.

In this podcast, Meaghan discusses Veeva Systems’ journey to PBC conversion.  Conversation topics include:

1. How the possibility of a PBC conversion to be on the board’s agenda – and what advantages were identified

2. What type of shareholder outreach Veeva conducted before the special meeting – and what type of reaction it received from outside shareholders when it told them it was considering this as a possibility

3. What Veeva did under state corporate law to effect the conversion – and whether it’s planning many changes to its board committees and SEC disclosures to reflect the broader “stakeholder” focus

4. Whether PBC conversions will become a trend

5. Meaghan’s advice for in-house lawyers or outside counsel who might be advising clients on whether to convert to a PBC

The CEO of Veeva Systems posted this op-ed yesterday saying there’s a need for companies to evolve and he urges other CEOs and directors to take action by considering a PBC conversion.

Investor Tips for Enhancing ESG Reporting

EY recently issued a report outlining investor expectations for the 2021 proxy season based on conversations with more than 60 institutional investors representing $38 trillion in assets under management. One topic that’s sure to be top of mind for many investors this proxy season is portfolio company ESG reporting and the report provides tips for how companies can enhance ESG reporting.

When assessing a company’s ESG practices and performance, the report found investors place the most value on direct company engagement, which is reassuring since direct engagement can help ensure investors receive a fulsome picture of company ESG initiatives and progress. Third-party ratings aren’t as high on the list in terms of perceived value but 40% of investors still ranked them as a medium or high-value information source.  This excerpt describes how investors want companies to help ensure their disclosures are picked up by third-party data aggregators:

Some large asset managers rely on third-party data providers to aggregate and structure company disclosures in a way that is more scalable and efficient to their processes, allowing raw ESG data across thousands of companies to be uploaded into their internal platforms for assessment.  While investors generally acknowledged limitations of third-party data (e.g., gaps, data quality issues) they stressed their need to have data at scale. To make these processes successful, investors encouraged companies to take a more proactive role in confirming that their data is being picked up correctly by leading third-party providers.

The report says other ESG reporting enhancements investors would like to see align with one or more of the following: focus on what is material and the connection to strategy, align disclosures with external frameworks, disclose metrics, performance and goals, consider integrating material ESG disclosures alongside traditional frameworks and enhance data credibility through assurance.

PCAOB Conversations with Audit Committee Chairs: Year 2

Following the launch of an engagement program in 2019, the PCAOB recently issued a report summarizing information gathered from conversations with nearly 300 audit committee chairs. The conversations addressed several topics, with the report saying the overarching theme of conversations involved effects of the pandemic on the audit.  Other conversation topics included the auditor and communications with the audit committee, new auditing and accounting standards and emerging technologies.  With respect to emerging technologies, here’s an excerpt about what audit committees say works well:

– Discussing how use of technology will impact the audit team’s time and resource allocation

– As new technologies are implemented, discussing with management if/how the underlying controls will change and discussing with the auditors how they will evaluate and test any changes to the new controls

– Holding deep dive sessions on specific topics related to emerging technologies, new technology tools used in the audit and cybersecurity

– Discussing whether third-party software or data processing is used in the company’s financial reporting processes and if so, how risks and controls are considered and addressed

Audit committee chairs also identified several areas for improvement including guidance around auditing of certain controls for third-party vendors. So, as much as discussion of use of third-party software is among the emerging tech items identified as working well, it can be a challenging topic and one that auditors and audit committees each grapple with amid heightened attention on risk oversight responsibilities.

– Lynn Jokela

February 10, 2021

Board Technology Committees: SolarWinds & Infodemic Reignite the Conversation

Last summer, Liz blogged about one take on what a “stakeholder” board could look like. She noted how some view re-examining the board’s structure as an opportunity to more closely align the board with strategy & culture.  As much as stakeholder interests are in the spotlight, so is the concept of business transformation – which, among other things, often relates to advancements in digital and AI technologies.

Not only that, but stakeholders will be holding companies accountable for failures to safeguard data and systems. The SolarWinds hack from late last year shows that vulnerabilities are constantly being found and exploited – and we’re facing a pretty dystopian future if those weaknesses aren’t addressed.

We’ve blogged several times over the years about the appeal of board technology committees and the need for a digitally savvy board. But recent events are reigniting that conversation. Just today, Liz blogged on the Proxy Season Blog that ISS ESG will now be rating boards on information security risk management & oversight as part of QualityScore. A couple of recent articles offer views on board oversight related to data integrity and digital and AI technologies – and serve as a reminder that the need for board technology expertise isn’t likely to diminish:

In a HBR article, Brad Keywell, founder and CEO of Uptake Technologies, makes an argument for creation of a board-level “data integrity committee.”  Keywell asserts that data integrity is foundational and that operational data is a company’s most undervalued and risk-embedded asset.  Observing that data integrity lacks a specific guardian in most corporate governance structures, Keywell says companies that want to stay ahead of the curve should have a board committee take the lead.

In another article, Karen Silverman, CEO and founder of The Cantellus Group, says boards need a plan for AI oversight in context of the company’s mission and risk management. Silverman suggests boards be proactive to ensure they have a plan for AI oversight so they can leverage the benefits of AI while also considering the legal, regulatory, brand/reputational and business continuity risks it presents.

With directors already stretched thin, boards may be reluctant to form yet another committee. But leading IT research and advisory firm, Gartner, predicts 40% of boards will have a dedicated cybersecurity committee by 2025. Some companies have already moved in this direction – here’s a recent Accenture blog citing several examples of companies with a dedicated board level technology or cybersecurity committee. The blog opines that a dedicated committee is useful because it allows the board to focus on digital or cybersecurity risk – as well as the upsides & downsides of advanced technologies. This sends a strong signal to not only stakeholders, but also hackers.

For boards thinking about structure and expertise needs, check out our “Board Composition” and “Board Succession” Practice Areas and for memos about cybersecurity and the board’s oversight role, see our “Cybersecurity” Practice Area.

Resource for Board Composition Data

For those who work frequently with boards, you’ve probably been asked to pull together comparative board composition data.  Among other things, questions about board tenure, mandatory retirement, average age and board size are not uncommon.  To help answer those questions in a pinch, Spencer Stuart has an interactive comparison chart that provides key data for each S&P 500 sector.  You’ll also find more resources in our “Board Composition” Practice Area that can help when you’re on the receiving end of an unexpected call from one of your board members.

Tomorrow’s Webcast: “Audit Committees in Action: The Latest Developments”

Tune in tomorrow for our webcast – “Audit Committees in Action: The Latest Developments” – to hear Consuelo Hitchcock of Deloitte, Josh Jones of EY and Mike Scanlon of Gibson Dunn discuss evolving audit committee oversight responsibilities, updates to the auditor independence rules, the impact of Covid-19 to oversight of internal controls, internal audit risk assessments and external audit assurance for ESG data.

– Lynn Jokela

February 9, 2021

Market Mania: Corp Fin Issues Sample Comment Letter

Yesterday, Corp Fin issued a sample comment letter for companies conducting securities offerings during times of extreme price volatility. The Staff cautioned that the risks associated with price volatility are particularly acute when companies are seeking to raise capital during times of stock run-ups, high short interest or reported short squeezes, or atypical retail investor interest – i.e., the type of “market mania” that we saw a couple weeks ago with GameStop, and last summer with Hertz.

The letter highlights issues for companies to consider when preparing disclosure documents – including automatically effective registration statements and pro-supps that wouldn’t typically be subject to Staff review. In particular, the Staff wants companies to consider disclosing on the prospectus cover page:

– A description of recent stock price volatility in the company’s stock and any known risks of investing in the stock under the circumstances

– Comparative stock price information prior to recent volatility and any recent change (or lack thereof) in the company’s financial condition or results of operation that are consistent with the recent stock price change

– Any recent change in the company’s financial condition or results of operations, such as earnings, revenues or other measure of company value that is consistent with the recent change in your stock price – if no such change to financial condition or results of operations exists, disclose that fact

Corp Fin also suggests companies provide information about potential risk factors addressing the recent extreme volatility in a company’s stock price, effects of a potential “short squeeze,” the potential impact of the offering on a company’s stock price and investors and the potential dilutive impact of future offerings on investors purchasing shares in the current offering. The sample letter includes information each of these potential risk factors should include.

For use of proceeds, the sample letter also suggests that companies disclose the possibility that they may not be successful in raising the maximum offering amount and the priorities for proceeds received.

Corp Fin cautions that the sample comment letter doesn’t provide an exhaustive list of issues companies should consider. Companies experiencing extreme price volatility are encouraged to contact their Corp Fin industry office with questions about proposed disclosure. Kudos to Corp Fin for issuing this guidance so that advisors of companies that might get caught up in a fast-moving #stonk craze can prepare in advance.

SEC Acting Chair Lee Announces Executive Staff Roster

Last week, John blogged with big news about the recent SEC appointment of Satyam Khanna as Senior Policy Advisor for Climate and ESG and John Coates as Acting Director of Corp Fin.  Along with those appointments, the SEC released a roster of executive staff for Acting SEC Chair Allison Herren Lee. It’s a fair lengthy list of between 15-20 appointments, check it out to see who’s all involved with SEC activities.

Last Friday, the SEC continued with its string of appointments and issued an announcement that Kelly Gibson has been named Acting Deputy Director of the Enforcement Division.  Kelly has been serving as the Director of the Philadelphia Regional Office since February 2020 and has served in the Philadelphia Regional Office for the past 13 years.  Congratulations Kelly!

Insight into Perspectives of Acting Corp Fin Director

Along with the SEC appointment of Satyam Khanna, many practicing in securities law took note of the appointment of John Coates as Acting Director of Corp Fin. In addition to serving on faculty at Harvard Law School, Coates is a member of the SEC’s Investor Advisory Committee and also Chair of the Investor as Owner Subcommittee. To help shed light about Coates’s perspective on issues, this Cooley blog provides highlights about a few Committee recommendations he’s authored. The blog is worth a read, particularly for those interested several hot-button issues involving shareholder proposals and proxy advisors, and proxy plumbing.

– Lynn Jokela

February 8, 2021

Succession Planning: Reassuring Investors with Disclosure

CEO succession has been near the top of business news cycles lately – last week’s news about Jeff Bezos stepping down as Amazon’s CEO certainly played a part. One key board responsibility relates to CEO succession planning. Investors expect boards to have a plan and when the need arises – to appoint a new CEO in due course. As boards need to deal with views of multiple stakeholders, one dilemma is what board should say to investors and a SquareWell Partners report says it found only 20% of companies that have appointed a new CEO since January 2019 provided comprehensive disclosure of their succession planning process.

Some companies aren’t in a position like Amazon – where the company’s announcement named Andy Jassy as incoming CEO. Jassy reportedly previously described himself as Bezos’ shadow – and the announcement also said Bezos will transition to executive chairman. To underscore the importance of CEO succession planning, the SquareWell report cites research that found companies that are unprepared to appoint a successor in a timely manner lose on average $1.8 billion in shareholder value. The report notes, when it comes to succession planning, it’s understandable that companies may want to hold their cards close to the vest, but investors want reassurance that boards are ready to act. Here’s an excerpt about succession planning disclosure that can help reassure investors:

There might be a misunderstanding that investors expect to learn the names of potential successors or to micromanage the choice of the next leader while what they actually want is to see evidence that the board is fulfilling its fiduciary duty and is ready to ensure a smooth transition for all scenarios.

Companies taking succession planning seriously should allow different executives to gain experience in engaging with investors. Investor focus should be on the frequency of the review of the succession plans and asking boards how they ensure that the pipeline of potential candidates and the successor profile are always aligned with the evolution of the company’s strategy. Investors could also question the company’s leadership development programs to understand how the leaders of tomorrow are being groomed. The quality of the board’s answers to these questions should reveal how prepared the board really is to face the next CEO transition.

For a look at trends in Russell 3000 and S&P 500 succession practices, Heidrick & Struggles and The Conference Board recently issued their “2020 CEO Succession Practices” report. The report discusses trends, the Covid-19 impact on succession planning and predicts that if company performance continues to be unsteady, it’s likely more boards will face the need to navigate a leadership change sooner than they might have anticipated.  And for more practical insights about CEO succession planning, check out the transcript from our webcast “CEO Succession Planning in the Crisis Era” – there you’ll find tips about disclosure issues and steps boards and advisors can take now!

Form 10-K Considerations & Reminders

With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they’ve said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:

KPIs: The SEC’s Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.

Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.

Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.

Transcript: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season”

We’ve posted the transcript for our recent webcast: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – it covered these topics:

– Proxy Season Review Highlights

– Policy Guideline Updates

– Board Diversity

– ESG Reporting

– Compensation

For those diving in to drafting a company’s proxy statement, check it out for insight into what Glass Lewis and the firm’s investor clients will want to see in this year’s disclosures.

– Lynn Jokela

February 5, 2021

Section 13(d) Reform: On the SEC’s Agenda?

A recent Olshan blog discussing what activists might expect from a Gary Gensler led SEC raised the possibility that Section 13(d) reform just might find its way on to the SEC’s agenda. This excerpt explains these efforts might garner bipartisan support:

At the CFTC, Mr. Gensler demonstrated an ability to balance progressive political pressures with competing industry interests. Should he take a similarly pragmatic approach if confirmed to lead the SEC, one of the areas where a coalition can be brokered between different interest groups is reform of Section 13(d) of the Exchange Act. Adopted in 1968 as part of the Williams Act, Section 13(d) instituted a rigorous beneficial ownership disclosure regime that requires stockholders to promptly notify issuers if they accumulate significant stock positions.

Ever since, corporations and their advisors have agitated for increasingly stringent investor reporting obligations. Likewise, progressives skeptical of hedge funds and activism in general have also trained their sights on parts of Section 13(d). As a testament to the appeal of this sentiment to both the business community and progressives, legislation (the “Brokaw Act”) was introduced in the Senate in 2017 to intensify oversight of activist hedge funds through Section 13(d) reform by Senator Tammy Baldwin (D-WI) and former Senator David Perdue (R-GA), each a member of the peripheral wing of their respective party.

The blog suggests that in addition to potentially shortening the reporting window, the SEC’s efforts could include expanding the definition of “beneficial ownership” to include derivative instruments that are not subject to settlement in the underlying security.

Rule 10b5-1 Plans: Glass Lewis Offers Up “Best Practices”

Rule 10b5-1 plans are one of the “great divides” between those of us who are lawyers for public companies and literally everyone else who follows public company issues.  Most of us are borderline paranoid about crossing the t’s & dotting the i’s to make sure these plans provide the protection they’re supposed to provide (we even have an 87-page handbook devoted to that!). Most of them think these plans are a total scam – and point to the windfalls reaped by execs at Pfizer & Moderna for trades under 10b5-1 plans that seemed particularly well-timed to coincide with positive Covid-19 vaccine news.

That divide is one reason why I was kind of surprised by a recent Glass Lewis blog offering up some thoughts on “best practices” for 10b5-1 plans. These include typical suggestions like “cooling off” periods & public disclosure – but as this excerpt notes, the ultimate goal of these and other best practices is to provide transparency about the plan and its implications:

Other forms of best practice include avoiding the use of multiple, overlapping plans, avoiding short-term plans (most plans are six months to two years) and avoiding making changes to existing plans. All of these best practices help simplify the flow of publicly available information and present a clear way for insider trading rules to be followed. They help to avoid situations where executives are put into the spotlight, as was the case for Pfizer and Moderna – and ensure that when things do go public, the market has the information it needs to put things in context.

Now, since the blog’s title is “Operation Warp Pay,” I expected this discussion of best practices to be followed by a smackdown of the trading by the execs of these pharma companies.  Surprisingly, that wasn’t the case.  While the media reaction to Pfizer & Moderna’s 10b5-1 trading plans suggest that more could have been done on the transparency front, Glass Lewis concludes that the trades were essentially benign examples of lawful transactions under Rule 10b5-1.

Market Mania: History Doesn’t Repeat Itself, But It Often Rhymes

Have you ever heard of the Piggly Wiggly short squeeze? This article tells the story of the last time individual investors & Wall Street went toe-to-toe over a stock. It happened nearly a century ago, but it shows that Mark Twain was right when he said that “history doesn’t repeat itself, but it often rhymes.” (In case FT puts this behind their pay wall, this Of Dollars & Data blog also recounts the tale).

Also, check out Bruce Brumberg’s interview with former SEC enforcement lawyer John Reed Stark for a discussion of some of the legal issues involved in last week’s shenanigans.

John Jenkins