There’s so much chatter around the SEC’s final climate disclosure rule that I almost want to run a “guess the date” pool and offer the winner a snazzy prize. But I don’t want to get anyone in trouble with illegal gambling, so please participate in this purely speculative & just-for-fun anonymous poll instead:

– Liz Dunshee

With such an active SEC, it can be easy to lose track of what’s still in the queue. When SEC Chair Gary Gensler last shared his agenda, John noted that it targeted finalizing several rules in or around Q1:

– Climate Change Disclosure (April 2023)

– Cybersecurity Risk Governance (April 2023)

– Special Purpose Acquisition Companies (April 2023)

– Modernization of Beneficial Ownership Reporting (April 2023)

– Share Repurchase Disclosure Modernization (April 2023)

We’ve already said more than enough today about climate disclosure. Within the past two weeks, the SEC has reopened the comment period for the beneficial ownership reporting rules and adopted final rules for share repurchase disclosures (mark your calendars for our May 24th webcast).

The Commission’s progress on Chair Gensler’s “to-do list” has left many folks wondering, what about cyber & SPACs? At the ABA’s spring meeting, Corp Fin Director Erik Gerding said he did not expect SPACs to drop off the rulemaking agenda. Even though these deals have largely evaporated for the moment, the market is cyclical and there would be a benefit to having rules in place if the trend comes back to life.

For cyber, I have not seen any recent clues. Maybe we will see an open meeting announcement sometime soon, or maybe this will be part of the upcoming Reg Flex Agenda that is expected soon. It’s worth noting that the general topic is still very much on the SEC’s radar: in March, it proposed rules and reopened the comment period for cyber-related rules that would apply to investment advisers, brokers, transfer agents and others (here are memos). Comments for that are due in June.

It’s also worth noting – for what is probably the millionth time on this blog – that the Reg Flex Agenda simply reflects the priorities of the current SEC Chair and isn’t binding. The dates also tend to signify general time-frames versus specific monthly targets. So, while the Reg Flex can give insight, and the SEC certainly has been making progress on priorities announced earlier this year (including expected proposals), it unfortunately is not a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budget and workflow.

– Liz Dunshee

I was speechless when I saw the SEC’s announcement Friday that it had issued a $279 million whistleblower award. It’s the largest-ever bounty – more than double the previous record payment of $114 million in October 2020.

The SEC says the whistleblower worked with the agency for a “sustained period” to voluntarily provide original information that helped it expand an open investigation, which led to the successful enforcement of actions by the SEC and another agency. The $279 million award is a percentage of the sanctions collected by the SEC, as well as another agency in a related action. Here’s an excerpt from the SEC’s press release:

“The whistleblower’s sustained assistance including multiple interviews and written submissions was critical to the success of these actions,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower. “While the whistleblower’s information did not prompt the opening of the Commission’s investigation, their information expanded the scope of misconduct charged.”

The SEC keeps the identities of whistleblowers confidential and doesn’t identify the investigations and enforcement actions that the awards relate to. So, we can only speculate which Covered Action this might relate to. The SEC’s order says that the award went to just one person, even though two other people attempted to claim a piece of the action.

The SEC’s whistleblower page explains more about how the process work and has lots of interesting data – including the “top 10” awards.

– Liz Dunshee

A Tennessee court has ruled against the US Chamber of Commerce and the Business Roundtable in a lawsuit that they brought last July to stop the SEC’s 2022 rulemaking on proxy advisors.

In that 2022 rulemaking, the SEC had rescinded parts of its 2020 rules and related guidance that would have required proxy advisors to provide voting reports to the subject companies at or before the time the reports went to investor clients, and to provide the investor clients with notice of any written statements by subject companies about the proxy advisor’s voting advice. Those provisions were favorable to companies in that they gave more of a chance to catch and correct perceived inaccuracies.

The business organizations accused the SEC of not properly following the Administrative Procedures Act in rolling back the 2020 rules. In granting the SEC’s motion for summary judgment, the court said:

Neither argument has any merit, because the plaintiffs have not identified any way in which similarly situated parties have actually been treated differently. Rather, they have identified two extraordinarily abstract questions that come up in countless settings and that, unremarkably, are often answered differently in different circumstances.

Nearly every regulatory decision involves making a choice between using government power to coerce the regulated parties or leaving those parties to their own devices. And nearly every regulation involving the exchange and/or production of information requires the relevant agency to favor more or less transparency. The fact that the SEC often favors transparency and oversight does not mean that it is locked into a policy of maximal transparency and maximal oversight every time it promulgates a rule. Such an approach would have no basis in caselaw, the text of the APA, or the text of the Exchange Act.

The 2022 iteration of the proxy advisor rules isn’t out of the woods quite yet. The National Association of Manufacturers also challenged the SEC’s 2022 rules, and that lawsuit is still pending.

– Liz Dunshee

The SEC has never been super cozy with the crypto industry, but things have gotten especially prickly lately. In one of the latest illustrations of friction, Coinbase recently filed an action in US federal court to compel the Commission to respond to the rulemaking petition it submitted last summer. This “flipping the tables” move follows the company’s disclosure in March that the SEC is investigating it.

A blog post from Coinbase chief legal officer Paul Grewal explains the company’s motivations for filing the legal action – which takes the form of a petition for writ of mandamus to the SEC. This Reuters article from Alison Frankel gives more detail on why the move is so unusual:

In the rare instances in which regulated businesses have persuaded appellate requests to order federal agencies to respond to their rulemaking petitions, the allegedly unreasonable delay has been a matter of years, not months.

As Alison notes, the action says that Coinbase has met with the SEC more than 30 times over the past year to present paths to registration for digital assets. In light of the Commission’s stepped-up enforcement stance against crypto, Coinbase wants the SEC to put its cards on the table. Here’s an excerpt from Coinbase’s court filing:

The SEC’s refusal to respond to Coinbase’s rulemaking petition is, in the parlance of the Administrative Procedure Act (APA), “agency action” that has been “unreasonably delayed.” 5 U.S.C. § 706(1). Coinbase brings this mandamus action to compel the SEC to do one simple thing: state on the record whether or not it will initiate proceedings to establish the ground rules that it has charged others and may soon charge Coinbase with failing to follow. The APA requires the Commission to take that simple step.

Moreover, all of the Commission’s actions suggest it has already decided internally to deny Coinbase’s petition, and is simply withholding a formal decision from Coinbase and the public, with the effect (and perhaps intent) of frustrating judicial review. But Coinbase and the crypto industry have an urgent right to a judicially reviewable decision, especially when facing unlawful, arbitrary, and capricious threats of enforcement from the Commission on the very same issue in the interim.

– Liz Dunshee

I was so focused in the blog yesterday on the actual share repurchase disclosure requirements that the SEC adopted on Wednesday that I did not get a chance to address the obvious question that comes to mind when considering the Commission action: “Why would the SEC remove disclosure of monthly share repurchase information from the body of periodic reports and now require daily share repurchase data in an exhibit to those same periodic reports?” The outcome, which is of course is less bad than requiring daily reporting of share repurchase activity as was originally proposed, still leaves practitioners scratching their head as to whether we are moving in the direction of “data dump” disclosure – i.e., where we get away from carefully crafted quantitative and qualitative disclosure that is filtered by materiality in the body of periodic and current reports toward providing datasets that can be readily crunched by analysts, academics and the SEC to serve their own purposes.

In getting to the “why?” it should first be noted that, in recent years, politicians, institutional investors, the media, academics, and governance experts have all criticized share repurchase programs for a wide variety of reasons, and the criticism has only mounted in the past few years amidst the COVID-19 pandemic and the current economic malaise. The focus on share repurchases culminated in the imposition of an excise tax on repurchases in last year’s Inflation Reduction Act of 2022, and the criticism of share repurchases always made it highly likely that the current Commission would act in some manner on the topic. However, in the adopting release for the final share repurchase disclosure rules, the SEC acknowledges:

Existing studies, including a review by Commission staff in 2020, have considered the rationales and effects of repurchases. As our staff concluded, repurchases are often employed in a manner that may be aligned with shareholder value maximization. Together with dividends, repurchases provide an avenue for returning capital to investors, which may be efficient if the issuer has cash it cannot efficiently deploy. Such returns of capital may also send signals to investors that managers are operating the issuer efficiently rather than retaining excess cash for potentially suboptimal use.

Despite these conclusions, there is still mistrust of why repurchases are conducted. The Commission goes on to note in the adopting release:

At present, because issuers are not required to report daily repurchase transactions or provide additional qualitative disclosures about those transactions, it can be difficult to determine whether repurchase timing may have been motivated, at least in part, by factors other than long-term value maximization. For example, issuer repurchases may be influenced, in part, by a desire to achieve certain accounting metrics or for other potentially suboptimal reasons. Some research has found that issuers that would have narrowly missed an earnings per share (“EPS”) target were more likely to have engaged in repurchases, which through their mechanical effect of decreasing the denominator of that measure help such issuers to meet their target.

The fact that repurchases can significantly impact executive compensation for some issuers may also affect how managers choose to employ repurchases. Like all investors, executives who receive equity-linked compensation stand to benefit from repurchases that improve their employer’s long-term stock price, but in some cases executives may realize additional gains unavailable to other investors because of trading by executives or the structure of compensation to those executives. Some studies have found personal trading by insiders close in time to predictable changes in share price caused by repurchases or repurchase-plan announcements, such as concentrated sales in the period immediately following the issuer’s repurchase. Issuers may also adjust the timing of their repurchases or repurchase announcements to increase the returns on insider equity sales. In these cases, by timing their sales to closely follow issuer purchases, executives can benefit in ways that confer a personal benefit to executives without necessarily increasing the value of the firm. Thus, equity-based or EPS-tied compensation arrangements could potentially be one factor that may influence some executives’ decisions to undertake repurchases. Shareholders may not have sufficient information about all of these possible purposes and impacts of issuer repurchases.

In explaining the rationale for replacing the monthly repurchase data with daily repurchase data and enhancing the required disclosure around objectives or rationales for the company’s share repurchases, the Commission notes:

The current reporting regime, in which investors receive information only about the monthly aggregate repurchases of issuers, fails to provide enough detail for investors to draw informed conclusions about the purposes and effects of many repurchases. In contrast, the amendments we are adopting will provide investors with data about the daily repurchase activity of an issuer and additional qualitative disclosures that investors can combine with other disclosures, such as the timing of compensatory awards or executive equity transactions, to observe whether a given repurchase was apt to affect executive compensation. Data on daily transactions and the additional qualitative disclosures would also reveal patterns in which repurchases were undertaken at times or under conditions that were likely to affect imminent accounting metrics, or prior to the release of material nonpublic information by the issuer. Investment advisers may use this data in assisting investors in assessing the purposes and effects of share repurchases.

Thus, the rationale here seems to be that the data dump of daily repurchase activity will facilitate speculative analysis as to the rationale for share repurchases based on the relative timing of those repurchases. That seems to me to be a significant departure from the usual approach to SEC disclosure, and hopefully this is not a harbinger of things to come.

– Dave Lynn

As can be expected these days, our trusty lawmakers in Washington have turned the debt ceiling into a political football, so now we are greeted each day with dire warnings of our nation’s imminent default on its obligations and the cataclysmic consequences that action could bring. For some reason, we are all conditioned at this point to go about our business with the optimistic viewpoint that the geniuses on Capitol Hill will somehow reach a resolution.

Even with this outlook, it never hurts to have a backup plan, and this recent memo from Cleary outlines considerations for directors and management of corporations in light of the impasse over the debt ceiling, even if the situation is ultimately resolved. You should also consider the guidance from Davis Polk that Liz blogged about back in January, now that the “deadline” approaches and the impasse continues. Let’s hope this all gets resolved soon.

– Dave Lynn

The interpretive questions about the SEC’s share repurchase disclosure rules are streaming in, so you will want to keep up with our continuing coverage of this and other SEC rulemaking developments. You will not want to miss our upcoming webcast – “Managing the New Buyback Disclosure Rules” – which will take place at 2:00 pm eastern time on Wednesday, May 24. Also, we will be covering the share repurchase disclosure rules in detail in the May-June issue of The Corporate Counsel. And finally, now is the time to sign up for our September Conferences so you can take advantage of the early bird rate. We will no doubt spend a lot of time at the Conferences discussing new SEC rules and interpretations, so you do not want to miss those insights. Let’s face it – you need us now more than ever!

– Dave Lynn

Yesterday, by a 3 to 2 vote, the SEC adopted amendments to the share repurchase disclosure requirements. As originally proposed back in December 2021, the amendments would have required that a company furnish a new Form SR before the end of the first business day following the day on which the company executes a share repurchase. As adopted, the amendments require disclosure of daily repurchase data, but only on a quarterly basis and, for domestic issuers, in an exhibit to their periodic reports. The changes from the proposal prompted Commissioner Peirce to note in her statement: “The final rule is not as bad as it could have been, but better-than-it-might-have-been is not my standard for supporting a final rule.”

As noted in this fact sheet describing the rule changes, under these amendments domestic companies will be required to:

– Disclose daily quantitative repurchase data at the end of every quarter (rather than on a daily basis as proposed) in an exhibit to their periodic report on Form 10-Q and Form 10-K (for a company’s fourth fiscal quarter);

– Include a checkbox above the tabular disclosures indicating whether certain officers and directors purchased or sold shares or other units of the class of the company’s equity securities that are the subject of a company share repurchase plan or program within four business days before or after the announcement of a company share repurchase plan or program.

– Disclose in each periodic report on Form 10-Q and Form 10-K the objectives or rationales for the company’s share repurchases and the process or criteria used to determine the amount of repurchases and any policies and procedures relating to purchases and sales of the company’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.

– Disclose in periodic reports on Forms 10-Q and 10-K (for the company’s fourth fiscal quarter) the company’s adoption and termination of Rule 10b5-1 trading arrangements.

Further, the amendments eliminate the current requirements in Item 703 of Regulation S-K to disclose monthly repurchase data in periodic reports. In a change from the proposal, the daily quantitative repurchase data required by the final amendments will be treated as “filed” instead of “furnished.” Information required pursuant to these disclosure requirements must be tagged using Inline XBRL.

Domestic companies will be required to comply with the new disclosure and tagging requirements in their periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. As a result, a company with a December 31, 2023 fiscal year end will be required to begin complying with the new disclosure and tagging requirements in their Form 10-K for the fiscal year ending on December 31, 2023 as it relates to repurchases made during the quarter ending December 31, 2023.

We will be posting memos regarding the new rules in our “Stock Repurchases” Practice Area and we have updated TheCorporateCounsel.net Cheat Sheet to reflect the adoption of the final rules.

– Dave Lynn

In adopting the final amendments to the share repurchase disclosure requirements, the SEC did not let the fact that foreign private issuers do not file quarterly reports stand in the way of quarterly reporting of daily share repurchase data. In a distinct departure from the historical approach to Exchange Act reporting by foreign private issuers, the SEC adopted new Form F-SR, which will require the disclosure of repurchase information within 45 days after the end of a foreign private issuer’s fiscal quarter. The move prompted Commissioner Mark Uyeda to note in his statement:

However, in the future, these amendments may be remembered as the beginning of the end for the Commission’s approach to foreign private issuers (“FPIs”). For more than 55 years, the Commission has allowed FPIs to satisfy their Exchange Act reporting requirements by (1) filing an annual report with information comparable to disclosure provided by domestic companies and (2) furnishing a Form 6-K for any material information disclosed by the FPI under its home country laws, reported pursuant to stock exchange requirements, or provided to its shareholders. Today’s amendments will require FPIs to make quarterly filings to report share repurchases regardless of their home country’s disclosure requirements. This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements. Given the significance of this shift in regulatory philosophy, the Commission should have undertaken a separate rulemaking on the issue, instead of including this change as part of a rulemaking focused on share repurchase disclosure.

Foreign private issuers that file on the foreign private issuer forms (e.g., Form 20-F) will be required to comply with the new disclosure and tagging requirements in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form 20-F narrative disclosure that relates to the Form F-SR filings, which is required by Item 16E of Form 20-F, and the related tagging requirements will be required starting in the first Form 20-F filed after their first Form F-SR has been filed.

– Dave Lynn