Wachtell Lipton recently published an updated version of its longstanding “Audit Committee Guide.” The 2023 edition weighs in at 212 pages. Here’s an excerpt about the audit committee’s role in risk management – a topic that’s taken on heightened importance due to market fluctuations, regulatory enforcement initiatives, and today’s complex & interconnected business environment:
The board should implement a coordinated approach toward risk oversight and ensure an effective flow of information among the directors, senior management and risk managers in order to satisfy itself as to the adequacy of the risk oversight function and to understand the company’s overall risk exposures. Given the NYSE requirement, if a company oversees some or all risk management through a structure that uses a board committee other than the audit committee, these processes should nonetheless be reviewed in a general manner by the audit committee (but the risk management function of such other committee need not be replaced or duplicated by the audit committee).
If a company charges the audit committee with overseeing risk management, the audit committee should schedule time in its agenda for periodic reviews of risk management outside the context of its role in reviewing financial statements and accounting compliance. The audit committee should also hold sessions in which it meets directly with key executives primarily responsible for risk management and compliance programs. In light of the Caremark standard discussed below (see Chapter XI: “Audit Committee Member Liability Issues”), an audit committee charged with overseeing risk management should feel comfortable that “red flags” and “yellow flags” are being reported to it so that key risks may be investigated and reported to the board if appropriate.
It is important to build a record demonstrating allocation of sufficient time and focus to the risk oversight role. The goal should be to provide, through one means or another, serious and thoughtful board-level attention to the company’s risk management process and system. Further, in light of a recent Delaware holding that corporate officers may be held liable for breach of the duty of oversight, as discussed below (see Chapter XI: “Audit Committee Member Liability Issues”), the board committee tasked with overseeing risk management should take steps to ensure that officers are implementing appropriate corporate controls and addressing issues as necessary.
In addition to an overview of best practices, the Guide includes Model Charters, a Model Audit Committee Responsibilities Checklist, a Model Audit Committee Member Financial Expertise and Independence Questionnaire, a Model Audit Committee Pre-Approval Policy, Model Policies and Procedures with respect to Related Person Transactions, Model Whistleblower Procedures and a Model Audit Committee Self-Evaluation Checklist, and more – which can be modified to fit specific company situations.
This resource is posted along with heaps of other helpful resources in our “Audit Committees” Practice Area. If you aren’t already a member of TheCorporateCounsel.net, start a “no-risk trial” today! Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
We’ve been getting a lot of questions about when to expect the SEC’s final climate disclosure rule. The short answer is we don’t know for sure. A new “Reg Flex” agenda is coming soon – and while that only reflects priorities of the Chair and general timeframes (not precise dates), it will shed some light on where things stand (or, at least, “stood” – as of April 10th – which is when the Staff submitted the info for the Unified Agenda).
At the spring meeting of the ABA Business Law Section a couple of weeks ago, Corp Fin Director Erik Gerding noted that the Staff is still engaged in the very important step of reviewing the thousands of comment letters that were submitted in response to the proposal – with greenhouse gas emissions and the Reg S-X thresholds for certain line item disclosure requirements being a couple of the top items that require careful consideration.
An additional piece of context, which Lawrence blogged about yesterday on PracticalESG.com, could be the potential interplay with EU rules. Although the notion of aligning with established reporting protocols was a theme in comment letters submitted on the SEC proposal, more issues are coming into focus as the EU regime moves forward. Here’s an excerpt from Lawrence’s blog:
One slight surprise might be new interplay between the EU Corporate Sustainability Reporting Directive (CSRD) and SEC’s proposal. The Wall Street Journal wrote that the EU indicated they may waive at least some aspects of CSRD requirements for US companies if the SEC’s final requirements “are rigorous enough.” Alignment between the two disclosure mandates would certainly be beneficial and reduce the reporting burden on US multinationals, so it makes sense that the SEC would consider the door that now appears to be open.
Yet this development may not be welcome news to everyone. Previous rumors indicated that the SEC’s support for Scope 3 emissions determinations and reporting may have been fading after consideration of the 15,000 comments submitted on the proposal. There were building expectations that the final release would not include Scope 3 requirements. However, the EU disclosure requirement includes Scope 3, so SEC’s final rule would have to address Scope 3 in a manner meaningful enough for the EU to consider it equivalent. Given that, it seems likely that Scope 3 may be back on the menu for US companies.
The WSJ – with Refinitiv data – estimates that the EU sustainability rules will affect 10k non-EU companies, about a third of which are US-based. Former SEC Commissioner Rob Jackson recently speculated that whatever the Commission and Staff are sorting through with respect to the final rule, it may take until autumn to figure it out…which, as Dave blogged last week, is also when the Supreme Court will be considering a case that could affect SEC rulemaking authority.
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:
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:
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 adoptedfinalrules 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.
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.
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.
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.
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.
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.
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!
