September 4, 2020

“Accredited Investor” Amendments: New Sample Subscription Agreement

Lynn blogged last week about the SEC’s amended “accredited investor” definition. We’re posting the avalanche of memos in our “Private Placements” Practice Area. Courtesy of the Stinson firm, we’ve also now posted a sample subscription agreement – in Word format and in a redlined PDF that shows updates for the new definition.

Eight Steps to Better Board Succession

This Heidrick & Struggles memo describes the increasingly complicated and important issue of board composition – and notes that too few boards rigorously evaluate their composition to ensure they’re meeting demands for digital & sustainability expertise and diverse experiences. If director recruitment is an ongoing process, boards are better able to plan ahead and “future-proof” the organization. They recommend these eight steps to better board succession:

1. At least annually, evaluate board composition, individual director performance, and full board effectiveness in the context of the organization’s strategic objectives and purpose.

2. Make sure a single person is accountable for that process (likely the chair of the nominating and governance committee) but that it is broadly embraced by the full board.

3. Establish benchmarks for key areas of board composition, considering peer boards or other high-performing organizations.

4. Map out the skills and experiences the board will need to meet its objectives for the next 5 to 10 years holistically, taking into consideration multiple directors moving on and off the board. Refresh and discuss these needs annually.

5. As the company’s needs change, so should the board. Board refreshment through term limits, age limits, and regular evaluations against the strategic skills matrix is key.

6. Develop new recruitment strategies that challenge long-held norms about the most useful networks for recruiting and the most important types of career experience. Search broadly. Be open minded. (Note – this is especially important given investors’ focus on diversity)

7. Build relationships now with potential future directors. Get to know them today for tomorrow’s needs.

8. Ensure the board is both inclusive and attractive to potential directors. Test your assumptions about what inclusivity means for your board.

Transcript: “CEO Succession Planning in the Crisis Era”

We’ve posted the transcript for our recent webcast: “CEO Succession Planning in the Crisis Era,” which covered these topics:

– Why succession planning should be high priority
– How to maintain a dynamic & adaptable succession plan
– Keeping track of contract & procedural requirements
– Disclosure implications
– Transition mechanics
– Steps for boards & advisors to take right now

Liz Dunshee

September 3, 2020

Whistleblower Rulemaking: Cancelled…For Now

Earlier this week, the SEC announced two pretty substantial whistleblower awards – a joint $2.5 million award and a $1.25 million award – which looked like a lead-up to yesterday’s highly anticipated open meeting, at which the Commission would consider adopting amendments to its whistleblower program. Late Tuesday, however, the SEC posted a cancellation notice for the open meeting, and while sometimes the Commission still moves forward with rule adoption in that scenario, it’s not the case this time around (at least so far).

While the rulemaking delay might be a function of holiday schedules, given the controversial nature of the proposed amendments, this WSJ article notes that it’s the second time rulemaking has been called off and speculates that the Commissioners may not have reached consensus quite yet. The article summarizes the history behind the proposed changes – here’s an excerpt:

The regulator unveiled the proposed changes in 2018. Under the whistleblower program, tipsters who provide information that leads to a successful enforcement action against a company can be eligible for an award of between 10% and 30% of the overall monetary sanction.

Whistleblower advocates have supported changes that the SEC says would make it more efficient in processing claims, including one that would allow it to ban tipsters who provide false information or make repeated, frivolous claims.

But they have mounted a vocal opposition to several other amendments, including one that would allow the SEC to downsize awards for information that leads to fines of $100 million or more, simply because of their size. The amendment would disincentivize the highest-paid Wall Street insiders from providing information, whistleblower lawyers have said.

Whistleblower advocates have also criticized new guidance that could restrict the type of information whistleblowers can be rewarded for providing, and a new rule that disqualifies tipsters who don’t submit a special form before contacting the SEC.

DOL Takes Another Crack at ESG

Earlier this week, the US Department of Labor issued this proposal – to clarify how ERISA fiduciaries should exercise their proxy voting and other shareholder rights under the statute’s “investment duties” section. In a defensive move against “ESG” voting, the proposal says that fiduciaries can’t vote any proxy unless they determine that the matter has an economic impact on the plan. And as a follow-up to the SEC’s proxy advisor rules, the proposal also outlines “permitted practices” that fiduciaries are able to follow when voting, such as applying proxy voting policies. This Stinson blog gives more background – here’s an excerpt:

The DOL is concerned that some fiduciaries and proxy advisory firms may be acting in ways that unwittingly allow plan assets to be used to support or pursue proxy proposals for environmental, social, or public policy agendas that have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses, and in fact may have unnecessarily increased plan expenses

The Department has issued sub-regulatory guidance and individual letters over the years affirming that, in voting proxies and in exercising other shareholder rights, plan fiduciaries must consider factors that may affect the value of the plan’s investment and not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives. The Department believes, however, that aspects of the guidance and letters may have led to some confusion or misunderstandings. The proposal is designed to address those issues through a notice and comment rulemaking process that will build a public record to help the Department develop an improved investment duties regulation with the goal of ensuring plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.

According to a DOL official, the proposal would clarify Employee Retirement Income Security Act fiduciary duties for proxy voting and monitoring proxy advisory firms. In addition, the proposed rule would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.

This proposal is different than the proposed rule on “Financial Factors in Selecting Plan Investments” that the DOL issued in late June and has drawn over 1,000 comment letters – many in opposition. Both this proposal and the one from June are proposed amendments to 29 CFR 2550.404a-1. This week’s proposal states:

Both proposals include a proposed paragraph (g), but the Financial Factors in Selecting Plan Investments proposal proposes an effective date of 60 days after publication of a final rule. Depending on the publication date of the respective final rules, the Department may need to revise paragraph (g) to separately effectuate the final rules.

Reg S-K Modernization: Interplay with Form 10-K “Description of Business”

We’ve been posting a ton of memos about last week’s Reg S-K amendments – including this one from Gibson Dunn that includes perspectives on what the changes mean from a practical perspective and potential problems (as well as a summary table and blackline of the Reg S-K items). In addition, we’ve been fielding quite a few questions about the mechanics of last week’s Reg S-K amendments in our Q&A Forum – like this question about the interplay between the new rules and Item 1 of Form 10-K (#10,433):

The new rule amendments adopted by the SEC last week require disclosure of information material to an understanding of the general development of a company’s business and replace the 5-year (or 3-year for SRCs) time period specified in S-K 101(a) with a materiality standard. How is this rule change intended to apply to Form 10-Ks? There is no discussion in the proposing or the adopting release, but Form 10-K, Item 1. Business is very clear that “the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.”

Does anyone have views on whether this was an oversight in the new rulemaking? The discussion in both the proposing and adopting releases appears to suggest that the new Item 101(a) amendments apply to all reports/registration statements subject to Item 101(a). But, there was no attempt in the rulemaking to amend the Form 10-K instruction quoted above. Therefore, based on a very plain and clear reading, the Form 10-K discussion is only required to include a discussion of the general development of the business since the beginning of the last fiscal year.

Do others agree / have other thoughts?

John responded:

That’s an interesting observation. I agree that there appears to be a disconnect between the new language of Item 101(a) and the current requirements of Item 1 of Form 10-K. In reading the adopting release, the intent of revised Item 101(a) appears to be that companies must either provide a full blown, principles based description of the development of the business that addresses the matters identified in Item 101(a)(1), to the extent material, or simply provide an update & incorporate the more complete disclosure by reference along with the link required by Item 101(a)(2). But the Form 10-K line item continues to require updating disclosure addressing only the fiscal year covered by the report, so some sort of clarification (or a revision to the 10-K line item) would be helpful.

For a fair number of companies, this issue probably isn’t going to matter very much. That’s because many companies have a practice of continuing to provide a discussion of the general development of their business over the previously required five year period in their 10-K filings, rather than just providing updating disclosure covering the most recent fiscal year. For example, check out GM’s comment letter on the rule proposal in which it objected to the proposal to permit only updating disclosure. GM’s letter noted that “this rule change would have a minimal impact on GM’s current disclosure,” and stated the company’s belief that “the entirety of this disclosure should be included in each filing.”

Liz Dunshee

September 2, 2020

Caremark: 10-K Disclosure Can Show Directors Ignored “Red Flags”

Last week, the Delaware Court of Chancery rejected a motion to dismiss in Teamsters Local 443 Health Services & Insurance Plan v. Chou – making it the latest in a string of Caremark claims that have made it past the pleadings stage. This blog from Ann Lipton explains the case – and notes that unlike other recent Caremark claims, VC Glasscock appeared to be much more cautious in finding a “failure to monitor.”

What tripped up the defendants in this case was the finding that the board had ignored red flags of illegal activity. The illegal activity involved a subsidiary that was pooling excess “overfill” medication from cancer vials into additional syringes, which led to contamination. This Troutman Pepper memo summarizes the three red flags that the plaintiffs adequately pled the board had ignored:

1. An outside law firm report had previously identified that Specialty, and by extension, Pharmacy, was not integrated into ABC’s compliance and reporting function, which according to the court, constituted a red flag that Specialty’s compliance mechanisms had substantial gaps that the audit committee had failed to follow-up on and rectify.

2. A former executive of Specialty had filed a complaint under seal in federal district court,alleging that Pharmacy’s business was essentially an illegal operation and, although ABC’s 2010 and 2011 Form 10-K disclosed the suit and was signed by ABC’s board of directors, the ABC board failed to take any remedial steps.

3. Specialty had received a subpoena from federal prosecutors which ABC believed, according to plaintiffs, related to the former Specialty executive’s action, which was subsequently disclosed in ABC’s 2012 Form 10-K, which was also signed by the ABC directors, and which was not referenced in the minutes of board or committee meetings.

The court found that it was conceivable that the board didn’t take any action to respond to the compliance report or either of the Form 10-K disclosures – therefore, the litigation is moving forward. This case highlights that directors who sign securities filings not only need to ensure that disclosure of legal proceedings & contingencies is accurate, they need to actually follow up on any concerning substance. As Troutman Pepper’s memo explains, those discussions should also be referenced in minutes:

Corporate fiduciaries and practitioners alike should be aware that corporate fiduciaries will be deemed to have knowledge of disclosures contained in filings and documents that they have executed (such as a Form 10-K). In this regard, it is especially important that directors are aware of, understand, and ask questions about what they are signing as a matter of compliance with their fiduciary duties.

In addition, Teamsters is evidence that minutes of board of directors and audit committee meetings will be heavily scrutinized in litigation. As applied in Teamsters, the absence of references to a red flag in minutes is equivalent to the board of directors or committee never having discussed the matter. Thus, counsel engaged in the representation of boards of directors and audit committees, as well as corporate officers, should be especially vigilant when drafting minutes in connection with the investigation and resolution of red flags.

Minutes should reflect that the risk or red flag was disclosed to the board or audit committee, that the board or audit committee followed-up on that risk and sought additional information, and ultimately, that the board either took at least some action to rectify that risk or red flag or determined that the risk or red flag was not necessary to further address.

NYSE’s “Direct Listings” Rule: Stayed!

Lynn blogged last week about the SEC order granting approval of the NYSE’s “direct listing” proposal for primary offerings. Yesterday, the SEC posted this letter to John Carey, Senior Director of the NYSE, to say that it had received a notice of intention to petition for review of its action under Rule 430 of the Administrative Procedure Act – which, according to this WSJ article, came from CII. Therefore, the direct listings order is stayed until the Commission orders otherwise.

This is just the latest in the ongoing back & forth on this rule change – last year, the SEC rejected the NYSE’s first attempt at a proposal only one week after it was filed.

Transcript: “Distressed M&A – Dealmaking in the New Normal”

We’ve posted the transcript for our recent webcast: “Distressed M&A – Dealmaking in the New Normal.”

Liz Dunshee

September 1, 2020

Supply-Chain Finance: Corp Fin Stepping Up Scrutiny

Corp Fin has sent comment letters to several well-established companies to request more info on their supply-chain finance arrangements – a practice that this WSJ article says the three biggest ratings firms highlighted as a “sleeping risk” last spring. Here’s an excerpt from the June comment letter to the Coca-Cola Company:

We note from your disclosures that accounts payable increased roughly $1.1 billion in 2019 due to the extension of payment terms with your suppliers. We further note from external sources that it appears you have in place a supply chain finance program. To the extent supply chain finance arrangements are reasonably likely to affect your liquidity in the future, please disclose the following:

• The impact the arrangements have on operating cash flows;
• The material and relevant terms of the arrangements;
• The general risks and benefits of the arrangements;
• Any guarantees provided by subsidiaries and/or the parent;
• Any plans to further extend terms to suppliers;
• Any factors that may limit your ability to continue using similar arrangements to further improve operating cash flows; and
• Trends and uncertainties related to the extension of payment terms under the arrangements.

In addition, please consider disclosing and discussing changes in your accounts payable days outstanding to provide investor’s with a metric of how supply chain finance arrangements impact your working capital.

In this response, the company resolved the comment by providing a draft of its intended future disclosure to describe the supply chain finance program in more detail in its MD&A – as well as its impact on cash flows, and associated risks & benefits.

This WSJ article notes that the SEC has increased scrutiny of supply chain finance arrangements over the last year and a half, and names a few more companies who’ve been on the receiving end of that scrutiny. Corp Fin called out supply chain finance arrangements in its Topic 9A Disclosure Guidance in June – and the practice also got a mention in the SEC’s adopting release for last week’s Reg S-K amendments:

Under the proposed amendments to Item 101(c), the revised rule would not explicitly reference the disclosure requirements under Item 101(c)(1)(vi) regarding disclosure of working capital practices, Item 101(c)(1)(ii) requirement regarding disclosure about new segments, or the Item 101(c)(1)(viii) dollar amount of backlog orders believed to be firm. Nevertheless, under the proposed principles-based approach, registrants would have to provide disclosure about these topics, as well as any other topics regarding their business, if they are material to an understanding of the business and not otherwise disclosed.

For example, if supply chain finance arrangements used by a registrant are a significant part of its working capital practices, they may be material to understanding the nature of its commercial relationships. While MD&A disclosures on the topic are more focused on the potential material impact of such arrangements on the registrant’s periodic cash flows and financial condition, the proposed principles-based approach would call for additional disclosure if material to an understanding of those commercial relationships. We discuss the proposals and our revisions with respect to the final amendments below.

CCPA Regs Now Effective: Update Your Privacy Policies

Final regulations under the California Consumer Privacy Act are now effective. There were a few changes from the previously proposed version, according to this BakerHostetler memo. This Quarles & Brady memo highlights several action items that result from the regulations – including an annual review of your privacy policy. Here’s an excerpt:

Review and update your privacy policy to include the more detailed disclosures required by the Regulations. Don’t forget that reviewing and updating your privacy policy must happen on an annual basis. It is not a one and done exercise.

Our September Eminders is Posted!

We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!

Liz Dunshee

August 31, 2020

Palantir’s “Direct Listing” IPO

Last week, Palantir filed the Form S-1 for its anticipated “Spotify-style” IPO. Despite new NYSE rules on “primary” direct listings, the company isn’t selling any shares in this deal – rather, existing shareholders will resell shares of Class A common stock on the NYSE.

For a company that’s been cloaked in mystery and has bestowed the title “legal ninja” on its in-house lawyers, the registration statement – much like a direct listing – is anti-climactic. Which is a compliment to everyone involved! As John tweeted, “the S-1 looks like it was written for grownups.” And unlike some of the other direct listings that we’ve seen, this one does include a D&O lock-up that runs until after the company announces its year-end results.

A few other things that jump out are:

Prospectus cover page – Underwriter logos are conspicuously absent (like other direct listing companies, Palantir has engaged several financial advisors on the deal – whose names first appear in a risk factor on page 65 – and of course their role is further described in the Plan of Distribution)

Plan of Distribution – Although there’s no formal book-building, there’s still the impression of some “shadow book-building.” The disclosure is clear that the banks are conducting investors communications & presentations only in connection with “investor education” and not to coordinate price discovery or sales…but it also says that the designated market maker will consult with Morgan Stanley on the opening public price, who will provide input based on pre-listing selling & buying interest that it becomes aware of. I’m sure this section was pored over by legal counsel & banks in excruciating detail, so check out the full thing if you’re interested in how the mechanics are described.

CEO Letter – Typical stuff we see from unicorns – soaring language about the company and its rejection of a typical business model – but also a critique of Silicon Valley’s “values & commitments” and a pitch that Palantir is forward-thinking, moral and justified in its approach to data collection.

Privacy – Under the heading “Our Team” on page 168, Palantir describes its “Privacy & Civil Liberties Engineering” team and its “Council of Advisors on Privacy & Civil Liberties” – as well as privacy-enhancing technologies.

Board Composition & Governance – Three of the six independent directors joined the board in July. The governance structure isn’t in place yet but is contemplated as part of the NYSE listing.

Multi-Class Cap Structure – In addition to the Class A common shares being resold in the offering, the company describes its Class B common stock (10 votes per share) and Class F common stock (a variable number of votes, all shares held in a voting trust established by co-founders Alex Karp, Stephen Cohen and Peter Thiel, and controlling up to 49.99% of total voting power). A risk factor notes that the company’s cap structure could make it ineligible for inclusion in certain indices.

Founder Voting Agreements – The company has yet to file the charter with the terms of the “Class F” shares – or the stockholders agreements – and that’s probably the most interesting part of the offering.

This registration statement will likely go effective before the new Reg S-K rules go into effect, so Palantir won’t have to worry about immediately revising its disclosure. While nobody seems too surprised about the net loss figures (this is a unicorn, after all), this Reuters article says that the offering will “test the appetite of capital market investors who have in recent years shown an increasing wariness of backing loss-making startups, most notably WeWork, which botched its IPO last year.” But as we’ve seen, 2020 is a whole new animal.

Shelf Registrations & Takedowns: 10-Page Guide

This 10-page Mayer Brown memo gives a nice overview of the shelf registration & takedown process – including permitted offerings, liability & diligence issues, benefits of the shelf registration process, filing requirements, and a timely section on how market volatility may affect WKSI status and shelf eligibility. The memo gives this checklist of key questions to ask if you’re contemplating a shelf registration or takedown (also see our 140-page “Form S-3 Handbook” for lots of detailed guidance):

1. Is the issuer planning to sell new securities or outstanding securities?

2. Are securities being immediately offered after the registration statement becomes effective?

3. Will the issuer choose to offer securities in a delayed primary offering?

4. Is the issuer considered a well-known seasoned issuer?

5. Is the issuer subject to the baby shelf limitation?

6. Is the issuer considering using a shelf registration for one or more acquisitions?

7. Will the issuer be required to file a post-effective amendment as opposed to a prospectus supplement?

Our “Proxy Disclosure & Executive Compensation Conferences” – Three Weeks Away!

You can still register for our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – to be held virtually Monday – Wednesday, September 21st – 23rd. We’ll be covering the latest issues that you need to know – including COVID-related pay adjustments and disclosures, human capital management, navigating proxy advisors, and shareholder proposal rules & trends. Here are the agendas – 15 panels over 3 days.

New this year, we have also added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions – you can sign up here. To make the most of your experience, check out this blog for tips for “virtual networking” for lawyers. Here’s an excerpt:

Be On-Camera: Speaking of cameras, please do not participate in a zoom networking event without being able to have a camera available. That black square with your name will not allow others to see who you are. It would be the equivalent to going to an in-person event and wearing a paper bag over your head. People would like to see who you are. Also, make sure that you are well lit when you are on camera. Too many people are on camera with the light behind them and you cannot see their faces clearly. A light should be in front of you.

Show up on time (or even early): This is something I advocate for IRL networking, but concerning virtual networking, it is even more important. It is distracting to have someone enter a conversation in the middle of a virtual event, as opposed to a live networking event, and should be avoided at all costs. And, if you have to leave early, you can just make mention that you have an appointment that you have to attend to and thank everyone who was there. You can send a note to the host using the chat feature. Or, you can just leave quietly.

As the blog notes, there are no marketing and business development tactics that cannot be done virtually. So take advantage of this opportunity to meet with your fellow practitioners in a low pressure way, have a good conversation, and make a connection or two.

Liz Dunshee

August 28, 2020

Dialed-in: SSGA Letter Calls for Racial Diversity Disclosures

Earlier this summer, I blogged about how Calvert called on companies and investors to take more tangible steps in addressing racial inequities. SSGA is also pushing for more change and yesterday, the asset manager posted a letter from its Global Chief Investment Officer specifying SSGA’s expectations for public companies relating to diversity, strategy, goals & disclosure.  Many companies disclose some of this information and if companies haven’t starting thinking about disclosure on these issues, this call from SSGA, one of the largest asset managers, might be the nudge that starts the ball rolling.

Addressed to board chairs, the letter says ongoing issues of racial equity have led SSGA to focus on ways racial and ethnic diversity impacts the asset manager as an investor. The letter says that starting in 2021, SSGA is asking companies to disclose more information relating to diversity and it breaks this information into five key areas. SSGA plans to cover these topics in engagement conversations and the letter says engagement is SSGA’s primary tool to understand a company’s plan and how the board carries out its oversight role – but for companies that don’t meet the asset manager’s expectations, it says SSGA is prepared to use its proxy voting authority to hold companies accountable. Here are SSGA’s five key areas for which it’s asking for more diversity disclosure:

Strategy: Articulate what role diversity plays in the firm’s broader human capital management practices and long-term strategy

Goals: Describe what diversity goals exist, how these goals contribute to the firm’s overall strategy, and how these goals are managed and progressing

Metrics: Provide measures of the diversity of the firm’s global employee base and board, such as by disclosing EEO-1 data (or data based on that framework) and at the board level, by disclosing diversity characteristics, including the racial and ethnic make-up of the board

Board: Articulate goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company’s workforce, community, customers and other key stakeholders

Board Oversight: Describe how the board executes its oversight role in diversity and inclusion

SEC Approves NYSE “Direct Listings” Proposal!

It’s been a busy week and late Wednesday, the SEC issued an order giving the go ahead to the NYSE on its “Direct Listings” proposal.  This will allow companies to sell newly issued primary shares on its own behalf into the opening trade and offers an alternative to the traditional underwritten IPO, providing a more cost-effective means to access capital.  Some may recall the NYSE amended the proposal twice after the SEC initially rejected the proposal last December.

The SEC’s order states that “after careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.”  Last November when the proposal was originally filed, some expressed concern about investor protection issues when not using the traditional IPO process, but the SEC’s order includes discussion rejecting that concern.

For those wondering about Nasdaq, Reuters reported that Nasdaq filed a similar proposal with the SEC earlier in the week.  To help members stay up to date on these developments, we’ll be posting memos in our “Direct Listings” Practice Area.

SEC’s Filing Fees: Going Down Nearly 16% on October 1st!

Earlier this week, the SEC issued this fee advisory that sets the filing fees for registration statements for 2021.  Right now, the filing fee rate for Securities Act registration statements is $129.80 per million (the same rate applies under Sections 13(e) and 14(g)).  Under the SEC’s new order, the rate will decrease to $109.10 per million, a 15.9% decrease.

Last year, the rates went up a little over 7% so it’s nice to see the rates turn the other direction.  As noted in the SEC’s order, the new fees will go into effect on October 1st as mandated by Dodd-Frank – which is a departure from back in the day when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.

– Lynn Jokela

August 27, 2020

SEC “Modernizes” Reg S-K! Risk Factors, Human Capital & More

Yesterday at an open meeting, the SEC adopted amendments to parts of Regulation S-K – specifically relating to Item 101 (business description), Item 103 (legal proceedings) & Item 105 (risk factors).  As anticipated, the amendments include increased focus on human capital.

These are the first significant amendments to these disclosure items in 30 years – and the updates have been many years in the making, as they’re part of the “disclosure effectiveness initiative” that emerged with the SEC’s 2016 concept release and continued up through last year’s proposal. These go beyond the “cleaning out the garage” amendments of a couple years ago and are intended to simplify the substantive disclosure requirements while also improving the readability of disclosure documents. The amendments shift away from prescriptive disclosures to a more principles-based disclosure framework.  Here’s an excerpt from the SEC’s press release with highlights:

– Amend Item 101(a) by:

  • making it largely principles-based, requiring disclosure of information material to an understanding of the general development of the business;
  • replacing the previously prescribed five-year timeframe with a materiality framework; and
  • permitting a registrant, in filings made after a registrant’s initial filing, to provide only an update of the general development of the business focused on material developments that have occurred since its most recent full discussion of the development of its business, which will be incorporated by reference;

– Amend Item 101(c) by:

  • clarifying and expanding its principles-based approach, with a non-exclusive list of disclosure topic examples drawn in part from topics currently contained in Item 101(c);
  • including, as a disclosure topic, a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business; and
  • refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws;

– Amend Item 103 by:

  • expressly stating that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure; and
  • implementing a modified disclosure threshold for certain governmental environmental proceedings resulting in monetary sanctions that increases the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, but that also affords a registrant some flexibility by allowing the registrant, at its election, to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant; and

– Amend Item 105 by:

  • requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;
  • refining the principles-based approach of Item 105 by requiring disclosure of “material” risk factors; and
  • requiring risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

The Commission adopted the amendments by a 3-2 vote – Commissioners Allison Herren Lee and Caroline Crenshaw dissented.  Some may have hoped for more prescriptive human capital disclosure requirements and the two dissenting statements each express concern with the principles-based nature of the rule. In Commissioner Lee’s dissenting statement, she said she would have supported the final rule “if it had included even minimal expansion on the topic of human capital to include simple, commonly kept metrics such as part time vs. full time workers, workforce expenses, turnover, and diversity.” Commissioner Lee also cited the rule’s “ill-advised omissions” of diversity and climate change. Commissioner Crenshaw’s dissenting statement says the rule fails to deal adequately with climate change risk and human capital and suggests the Commission form an external ESG Advisory Committee to help the Commission respond to ESG trends.

One aspect of the amendments some companies likely aren’t thrilled with is the new requirement to include summary risk factor disclosure when risk factor disclosure exceeds 15 pages.  Commissioner Hester Peirce’s statement says she views this change as a “bit of an experiment” and wonders whether the “penalty” of needing to prepare a summary will overcome the fear of litigation that leads companies to produce voluminous risk factor disclosures.

The rules will be effective 30 days after publication in the Federal Register and we’ll be posting the avalanche of memos in our “Reg S-K” Practice Area. We’ll also be updating our Handbooks on these topics.

There’s More!  SEC Amends Definition of “Accredited Investor” & QIBs

Before yesterday’s meeting even began, the SEC also adopted amendments to the definition of “accredited investor” in Reg D and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act.  The new “accredited investor” definition expands the number of investors eligible for this status – by allowing individuals to qualify based on their professional knowledge, experience or certifications while also expanding the list of entities that may qualify. In determining whether an individual would qualify as an accredited investor based on a particular certifications or credentials, under the amended definition, the SEC will consider, among other things, whether the certification, designation or credential arises out of an examination designed to reliably and validly demonstrate an individual’s comprehension and sophistication in the areas of securities and investing – examples being a Series 7, 65 or 82 license.

The SEC’s amendments to the definition of “qualified institutional buyer” broaden it by including LLCs, RBICs and any institutional accredited investor not already listed in Rule 144A when they meet the existing threshold of $100 million in securities owned and invested.

Although the SEC’s Press Release says the “SEC Modernizes the Accredited Investor Definition”, Commissioners Allison Herren Lee and Caroline Crenshaw issued a joint dissenting statement on the “Failure to Modernize the Accredited Investor Definition” that says despite support for indexing the accredited investor wealth thresholds to inflation, the amended definition fails to do so while also putting vulnerable investors at risk. And Commissioner Hester Peirce tweeted about her statement that the rule didn’t go far enough.

The new rules will be effective 60 days after publication in the Federal Register – and we’ll be posting memos in our “Accredited Investor” and “Rule 144A” Practice Areas. We’ll also be updating our “Regulation D Handbook”.

SEC Calendars Open Meeting: Amendments to Whistleblower Rules on the Agenda

Yesterday, the SEC also scheduled another open meeting – it’s scheduled for this coming Wednesday, September 2nd.  The Sunshine Act notice says that the Commission will consider whether to adopt amendments to rules relating to the SEC’s whistleblower program – it’s not clear whether they’ll move forward on some of the controversial amendments that were under consideration last year.  Here’s an excerpt from the notice:

The amendments would enhance claim processing efficiency, and clarify and bring greater transparency to the framework used by the Commission in exercising its discretion in determining award amounts, as well as otherwise address specific issues that have developed during the whistleblower program’s history. The Commission will also consider whether to adopt interpretive guidance concerning the term “independent analysis” in the Commission’s rules implementing its whistleblower program.

– Lynn Jokela

August 26, 2020

Providing Guidance: Where are We Now?

Last week, the NYT DealBook column said that shipping giant, A.P. Moller-Maersk, not only reinstated full-year financial guidance but also pegged it higher than pre-pandemic levels.  If your company is on the fence about what to do, you’re not alone as companies seem to be all over the map. 

A recent AlphaSense Analyst blog analyzed trends in companies providing or withdrawing quarterly or annual earnings guidance and says recent data shows continued uncertainty. Recapping Q1, the blog notes there was an unprecedented number of companies that withdrew guidance due to market turbulence that resulted from Covid-19. After reviewing Q2 updates, the blog says some companies have begun reinstating previously withdrawn guidance, while others maintained their ambiguous position and declined to provide guidance – in other words, companies are still sitting amid uncertainty, although some sectors lean more one direction than the other.  Here’s some takeaways:

– Since the huge spike in guidance withdrawals this Spring, companies have taken different approaches to providing guidance Q2 earnings, with a near even split between companies providing guidance and those declining to do so

– Consumer Discretionary companies declined to provide guidance most often, accounting for 19% of companies not providing guidance this quarter

– Information Technology companies account for 17% of companies declining to provide guidance and 24% of companies sharing guidance this quarter, showing a split in confidence across the sector

ESG Disclosure Trends: SEC Filings Increasingly Highlight Disclosures on Company Websites

A recent White & Case report summarizes ESG disclosure trends of the top 50 of Fortune 100 companies by revenue.  It’s a good look at where disclosure is headed as all of the information was pulled from SEC filings and it’s notable how much human capital and environmental disclosure was included in the filings.  When comparing 2020 data to 2019, it’s important to note the effect of the Covid-19 pandemic and the current social climate and how that has placed focus on companies’ management of ESG issues.  Here’s some of the report’s highlights:

– In 2020, every company surveyed increased its ESG disclosures in at least one category in their proxy statements compared to 2019

– The largest increase in ESG disclosures came in human capital management, in fact 90% of the companies surveyed included some form of HCM disclosure in their 2020 Form 10-K or proxy statement, increasing 8% from 2019

– 29% of the 2020 filings increased their environmental disclosure from 2019, with a significant increase in the amount of quantitative disclosures, such as information on greenhouse gas emissions reductions and renewable energy use

– Other ESG categories on the rise in 2020 include company culture, ethical business practices, board oversight of E&S issues, social impact/community and E&S issues in shareholder engagement

The report provides a few things for companies to think about that includes beefing up disclosure on human capital management, environmental, and board oversight of E&S issues – if companies haven’t already done so.  One tricky issue for companies is deciding where to include ESG disclosures – in SEC filings or on company websites.  The report says 84% of the companies surveyed referred readers to disclosure on the company’s website from their 10-K or proxy statement with an increasing number using their SEC filings to high-light for investors that enhanced ESG reporting is available on the company website.

Bloomberg Joins Mix with Proprietary ESG Score

We’ve blogged before about the various ESG ratings – here’s an entry about Morningstar and Sustainalytics joining up and now we can add Bloomberg to the mix.  Earlier this month, ThinkAdvisor reported that Bloomberg launched its own proprietary ESG score, available to Bloomberg Terminal subscribers.  Initially, the score will cover E&S for over 250 companies in the oil and gas sector and it will also include board composition scores for over 4300 companies.  For board composition, here’s an excerpt from Bloomberg’s press release:

The Board Composition scores enable investors to assess how well a board is positioned to provide diverse perspectives and supervision of management, as well as to assess potential risks in the current board structure. The quantitative model is designed by Bloomberg governance specialists and utilizes Bloomberg’s management and board level data. The scores rank the relative performance of companies across four key focus areas of diversity, tenure, overboarding and independence.

– Lynn Jokela

August 25, 2020

SV Risk Factor Disclosure Trends: Potential Impact of Proposed Rulemaking

Wilson Sonsini recently came out with its risk factor trends report among Silicon Valley’s 150 largest public companies.  One item the report delves into is the potential impact of SEC proposed rulemaking relating to risk factors that the Commission is slated to consider at its meeting tomorrow. Some may recall that the proposed amendments to Item 105 of Reg S-K would require summary risk factor disclosure if the risk factor section is greater than 15 pages and that companies organize risk factors with headings.

Wilson Sonsini’s report covers risk factor disclosures from Form 10-Ks filed from early 2019 through March 2020 and includes information of disclosure practices overall of the SV150.  Given the timing of the disclosures that were reviewed, the report doesn’t indicate trends in Covid-19 risk factor disclosure but it does illustrate how Covid-19 related disclosures impacted the overall length of risk factor disclosures. Here’s an excerpt:

Wilson Sonsini’s report says that 74% of SV150 companies include at least one heading for risk factors, with most including only one to three headings.  And, all companies that went public in the last five years include at least one heading in their risk factors – whereas companies that went public over 20 years ago only 39% include at least one heading in their risk factors.

As far as inclusion of summary risk factor disclosure, the report says none of the SV150 companies include an explicit summary risk factor disclosure in their 10-K filings.  So although this practice is rare, the report references Walmart’s Form 10-K filed in March of this year as a notable example of a titled summary risk factor disclosure (see page 5).

Other trends noted in the report include the number of pages of risk factors decreases as more time elapses since a company’s IPO – companies that went public in the last five years average about 27 pages of risk factors compared to companies that went public at least 20 years ago that average about 15 pages of risk factors.

As annual sales increase, the average total number of pages of risk factors also decreases.

Companies in the technology industry average the highest total number of pages of risk factors disclosure – approximately 23 pages.

Mandatory D&O Insurer Rotation: Solution for Mitigating Governance Risks?

That’s what one law prof suggests.  A recent entry on the Columbia Law School Blog asserts that mandatory rotation of D&O insurers could help control corporate governance risks.  Professor Andrew Verstein of UCLA School of Law grounds that assertion on his 66-page academic study in which he concludes that mandatory rotation of D&O insurers would leave insurers with only a few years to recoup any losses thus leading the insurers to serve as governance gatekeepers to limit those losses.

Like many academic studies, the study is thought-provoking as the author suggests D&O insurance itself contributes to governance problems and that the way D&O insurance is bought and sold harms governance.  The gist of the author’s argument in favor of mandatory rotation is based on a theory that companies rarely switch D&O insurers, leading insurers to be passive and not monitor risk because they can recoup losses over future years from their loyal customers.  By time-limiting the client-insurer relationship, the author says insurers would need to evaluate and price risks in real time rather than recouping any losses for years into the future. Here’s an excerpt summarizing the author’s reasoning:

Insurers should be permitted no more than five years with a given client, at which time they must take their underwriting elsewhere. Mandatory rotation renders the passive insurance model impractical. Insurers can never hope to insure passively and then recoup their losses down the line. Every insurer will have to actively vet insureds for risks pending over the next few years, to monitor for abrupt changes during that period, and to take steps to limit a corporation’s slide toward increase risk; the result is that corporations and their managers will be more likely to internalize the expected cost of their harmful behaviors and, thus, take those harms more seriously.

Through 66 pages, the author acknowledges the complexity of the D&O insurance model.  For a thorough critique of the study, Kevin LaCroix walks through a thoughtful series of observations about the author’s assumptions – and reasons for disagreement.  Up front, Kevin notes D&O insurers and their policyholders would be surprised to hear of the perceived loyalty between companies and their insurers since the D&O insurance environment can at times be “prickly.”  Among other things, Kevin also discusses how much chaos mandatory rotation of D&O insurers would cause.

Without getting into the weeds about the author’s assertion and assumptions, some might wonder how mandatory D&O insurer rotation would be enforced and one way the author suggests is for the SEC to require it.  As the author notes, this would require Congressional action because there is no colorable basis for the SEC to impose such a requirement on companies – I don’t think I’m going too far out on a limb in saying it’s unlikely this is coming along anytime soon.

SRCs: Scaled Disclosures & Tools to Help Determine Filer Status

With recent economic volatility, some companies might find themselves evaluating whether they qualify as “smaller reporting companies.”  Of course, companies qualifying as “smaller reporting companies” can take advantage of scaled disclosure requirements that are outlined in this BDO memo – it provides a quick summary for those able to take advantage of SRC filing status.  For more on determining filer status, which can be confusing, check out our “Disclosure Deadlines Handbook” and our “Smaller Reporting Companies – Entering Status” and “Smaller Reporting Companies – Existing Status” checklists available to members on

– Lynn Jokela

August 24, 2020

SEC’s Reg S-T Proposal: The End of “Fake” Filings?

Late Friday afternoon, the SEC issued proposed amendments under Regulation S-T aimed at promoting reliability and integrity of EDGAR submissions. If adopted, the amendments could mark the end of an era for “fake SEC filings” that we enjoy blogging about so much. But there’s still cause for celebration. In addition to aiming to curtail fake filings, the proposal is also intended to improve administration of EDGAR – for example, filing delays arising in connection with EDGAR outages (which have been a problem lately).  The proposed rule specifies the Commission can take the following actions to facilitate resolution of issues that arise in connection with EDGAR submissions:

– redact, remove, or prevent dissemination of sensitive personally identifiable information that if released may result in financial or personal harm;

– prevent submissions that pose a cybersecurity threat;

– correct system or Commission staff errors;

– remove or prevent dissemination of submissions made under an incorrect EDGAR identifier;

– prevent the ability to make submissions when there are disputes over the authority to use EDGAR access codes;

– prevent acceptance or dissemination of an attempted submission that it has reason to believe may be misleading or manipulative while evaluating the circumstances surrounding the submission; and allow acceptance or dissemination if its concerns are satisfactorily addressed;

– prevent an unauthorized submission or otherwise remove related access; and

– remedy similar administrative issues relating to submissions.

The proposed rule provides that in certain circumstances, such as a threat to EDGAR, the Commission may take corrective action without first communicating with the filer.  In such instances, the proposed rule sets forth a process for the Commission to notify filers and other relevant persons of actions it takes as soon as reasonably practicable.

Filers still need to ensure the accuracy and completeness of information in their EDGAR submissions and in most cases, address any errors by submitting a filer corrective disclosure.  The proposed rule will be subject to a 30-day comment period after publication in the Federal Register.

SEC Comment Letters Continue Downward Trend

SEC comment letters are still around and haven’t completely disappeared but if it seems like you don’t hear as much about them, it’s because they’re declining in number.  As reported in a recent Audit Analytics blog, SEC comment letters on Forms 10-K, 10-Q and 8-K continued a downward trend in 2019, a trend spanning the last nine years.  The decline in 2019 seems like quite a drop-off, although much of the decline is attributed to the government shutdown in early 2019. Between 2018 and 2019, the blog says the number of comment letters fell by 30% and this was after a 32% decline between 2017 and 2018.  The blog also reports that the number of conversations declined and that most reviews were resolved after one round of comments.  For something to watch, the blog notes ASC 842 – the lease accounting standard – became effective in 2019 for companies with calendar year-ends so keep an eye out for any comment letter trends relating to that.

July-August Issue of “The Corporate Executive”

The July-August issue of The Corporate Executive was just posted – & also sent to the printer.  It’s available now electronically to members of who also subscribe to the print newsletter at each of their locations (try a no-risk trial). This issue includes articles on:

– SEC Adopts Rules to Regulate Proxy Advisory Firm Recommendations: Where Do We Go from Here?

  • The Unique Role of Proxy Advisory Firms
  • The SEC’s First Shot Across the Bow: The 2019 Interpretive Release
  • ISS Responds: See You in Court!
  • This Means War: The SEC’s Rule Proposal
  • The Final Rules: Proxy Advisory Firm Regulation is Born—After a Decade in Labor!
  • Dissent
  • Next Steps
  • Supplemental Guidance for Investment Advisers
  • Status of the ISS Lawsuit
  • What Now?

– Considerations for the Use of Private Air Travel During the COVID-19 Pandemic

  • The Allure of Private Air Travel
  • Governance Considerations
  • SEC Disclosure Considerations
  • Applicable Aircraft Regulations
  • Tax Considerations
  • Conclusion

– Lynn Jokela