Yesterday, the Supreme Court announced that it would hear an appeal in the case of Loper Bright Enterprises v. Raimondo, which involves a direct challenge to the Chevron doctrine. This case will be considered by the Court in the next term. The outcome of the case could have a significant impact on SEC rulemaking efforts.
As I discussed in the blog last year, in 1984 the Supreme Court decided Chevron v. Natural Resources Defense Council, which created the doctrine that courts normally must defer to a government agency’s reasonable interpretation of a law that it administers when that law’s language is ambiguous. The SEC has argued that Chevron deference should be accorded to its actions over the years, often to the agency’s advantage.
The Chevron doctrine has been viewed as vulnerable since the Supreme Court’s decision last year in in West Virginia v. Environmental Protection Agency, in which the Court considered the “major questions doctrine,” a presumption that when an administrative agency asserts authority over questions of great economic and political significance, it may act only if Congress has clearly authorized it to do so.
In Loper Bright Enterprises v. Raimondo, the relevant question that the Supreme Court agreed to hear is “[w]hether the Court should overrule Chevron or at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.”
The case involves a herring fishing company named Loper Bright Enterprises, which is appealing a ruling that left in effect a National Marine Fisheries Service regulation based on the Chevron doctrine. That regulation requires herring fishing boats to allow a federal observer aboard to oversee operations and to compensate them for their time. Loper Bright Enterprises argues that the regulation significantly impacts its business and that the agency did not have the authority to impose the regulation.
The Conferences are virtual, taking place on September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. You can register online, by emailing sales@ccrcorp.com or by calling 1-800-737-1271.
On Friday, the SEC announced that it is reopening the comment period for the proposed amendments to the beneficial ownership reporting rules that were originally proposed in February 2022. These proposed amendments would modernize the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G and make other changes to the applicable rules. The SEC is now reopening the comment period to allow interested persons an opportunity to comment on the additional analysis and data contained in a staff memorandum that was added to the public comment file on April 28, 2023. The reopening release does not contain any proposed revisions to the proposed amendments. The referenced memorandum from the Division of Economic Risk and Analysis (DERA) states:
In particular, this memorandum provides additional background and baseline data on Schedule 13D and 13G filings in Section 1 below, followed by supplemental analyses on two specific points pertaining to Schedule 13D filings. First, in Section 2, this memorandum further investigates potential effects on activism that may result from the proposed change to the initial Schedule 13D filing deadline. Second, in Section 3, this memorandum provides additional analysis of potential harms to certain selling shareholders under the existing filing deadline. Both Sections 2 and 3 include a discussion of relevant academic research as well as new quantitative analysis.
The new comment deadline for the reopened proposal is 30 days after publication of the reopening release in the Federal Register or June 27, 2023, whichever is later.
The reopening of the comment period for the beneficial ownership reporting rules is similar to what the SEC did with respect to the share repurchase disclosure rulemaking, when back in December 2022 the SEC reopened the comment period to post a memorandum from DERA analyzing the impact of the enactment of the Inflation Reduction Act of 2022. The SEC also reopened the comment period for the clawback rules (for a second time) back in June 2022 to allow for comments on a memorandum from DERA.
The practice of reopening comment periods to consider additional economic analysis appears to be relatively novel concept. In the past, DERA’s role has been focused on providing the required economic analysis for proposing and adopting releases for a rulemaking, but it now appears that, in at least some rulemakings, DERA is continuing its research and analysis to inform the rulemaking effort in real time, and the Commission appears to be compelled to provide that research to the public in case it might change the public’s mind about various aspects of the rule proposal.
Another reason for reopening the comment period is when the Commission determines that it may be appropriate to significantly alter the proposed rules, but there does not appear to be sufficient latitude based on the original proposal and the comments submitted to make such changes without soliciting additional comment under the Administrative Procedure Act. If the Commission were to adopt a final rule that strays too far from what is proposed or suggested through the comment process, then that opens the agency up to a legal challenge that its actions were “arbitrary and capricious” in adopting the final rule. We recently saw this sort of reopening situation in the clawback proposal, where the SEC used a reopening release to propose, among other changes, the use of little “r” restatements as a triggering event under the required clawback policies. A similar situation played out with the pay versus performance disclosure requirements, when, in January 2022, the SEC reopened the comment period to revisit the calculation of compensation actually paid and propose additional performance measure disclosures. The Commission ended up adopting the final rules largely as they were described in the reopening release.
Could we see the Commission reopen the comment period for its other open rulemaking projects, such as climate change disclosure and cybersecurity? Anything is possible at this point.
In 2022, I had the opportunity to delve into the efforts of the Operations Subcommittee of the End-to-End Vote Confirmation Working Group. As we noted in the January-February 2022 issue of The Corporate Executive, the Operations Subcommittee of the End-to-End Vote Confirmation Working Group announced last year that it had agreed to provide end-to-end vote confirmation during the 2022 proxy season for Fortune 500 annual meetings that were tabulated by members of the Operations Subcommittee, and to pilot an early-stage vote entitlement reconciliation process for 20 Fortune 500 meetings. End-to-end vote confirmation is the affirmation to a nominee from the tabulator (and to the nominee’s beneficial owner by the bank or broker) that the vote made was counted as cast. Vote entitlement refers to bank’s or broker’s voting entitlement on behalf of their clients.
As Liz recently noted on The Proxy Season Blog, the Operations Subcommittee of the Working Group has published a report on its findings from the 2022 proxy season, which it shared with the full Working Group and the SEC. Liz notes the following key takeaways from the report:
– Need for industry participants to continue working together to identify cost effective and efficient solutions.
– Need for the regulators to review the findings and assist in moving forward regulations to strengthen the proxy process and continue building trust in the system. (Note: in large part, this will be determining (i) which party is responsible for resolving issues e.g., the tabulator or the bank/broker and its service provider, and (ii) a consistent process by which certain complex holding structures are voted, e.g. where shares are held via a US bank or broker via a Canadian participant or another foreign participant in a CSD.)
– Investigate whether a tabulator can efficiently and legally combine all entitlements for a bank or broker whether they are held at DTCC, a foreign depository, registered in firm name, or registered in customer name.
– Exchanges and regulators should ensure record date information is published prior to record date, including in the SEC’s Edgar system, preferably standardizing with the NYSE’s 10 calendar day record date notice requirement.
– Require tabulators to electronically receive or access omnibus proxies versus requiring paper, thus ensuring omnibus proxies are processed and adjusted promptly.
– Build the technology for vote confirmation to be “pushed” to the institutional and retail beneficial investors versus requiring the investors to retrieve. The industry recognizes this will be costly for the proxy service providers.
While the pilot may have fallen short of expectations in some cases, it was undoubtedly an important step forward for proxy plumbing reform, and hopefully we will see some rule changes and other developments come out of these efforts.
CFO Dive recently reported that a new lawsuit against SVB now names KPMG as one of the defendants, noting that the firm’s audit opinion issued only a few weeks before the bank’s collapse was silent on whether there was any doubt about SVB’s ability to continue as a going concern. Here’s an excerpt from the article, highlighting that the claims have renewed conversations about long-tenure and independence:
Even prior to the lawsuit, the short window between the audit and the bank run raised questions of how SVB’s auditors could have missed the signs of its impending doom so close to the collapse.
Previously KPMG has defended its work and CFO Dive reported that a KPMG spokesperson wrote that the firm conducts its audits in accordance with professional standards and noted that audit opinions are based on evidence available up to and at the date of the opinion.
However, the Silicon Valley matter has also spotlighted KPMG’s long tenure of 29 years working for SVB, raising the specter of whether cozy auditor-client relationships can cut into the rigor of audits. Although there are no regulations in the U.S. that limit the number of years that auditors can provide their services to clients, U.S. regulators have long contemplated limiting how long auditors can do so.
KPMG has also been criticized for its audit opinion failing to identify SVB’s unrealized losses on its bond portfolio as a critical audit matter, as reported by the Wall Street Journal. As noted in this Value Edge Advisors blog, PCAOB advisors are concerned that CAM disclosure in general has been less useful to investors than intended.
During a meeting of the PCAOB’s Standards and Emerging Issues Advisory Group on March 30, 2023, Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII), expressed concern that subsets of Auditing Standard (AS) 3101 aren’t being addressed in CAM disclosures—specifically, an indication of the outcome of the audit procedures with respect to the CAM and the auditor’s related key observations. Reuters also reports that the number of CAMs per audit has decreased over the years. With CAMs in the spotlight, perhaps that trend will reverse.
As we’ve noted previously on this blog, auditor independence is an issue that audit committees, in addition to auditors, need to stay on top of since violations of the independence rules can pose a serious risk to the audit client as well. This post from the CPA Journal has a good reminder that auditor independence considerations go beyond the list of specific relationships that render an auditor and the auditor’s firm as not independent—there is also a general standard to consider.
The post provides one case study where the CAO favored—and provided confidential information to—one firm in a bid for audit work, which resulted in the audit committee terminating the CAO’s employment and the audit firm’s engagement once it learned of the conduct. It also cites several other independence violations that involved a failure to comply with the SEC’s general standard rather than any of the specific prohibitions. Here’s an excerpt:
A lead engagement partner developed and maintained a close personal relationship with the CFO of an audit client and the CFO’s family. This relationship included frequent social events, gifts, and overnight out-of-town trips that involved lavish spending. The activities violated the audit firm’s policies, which identified such extensive relationships as creating “independence issues from an appearance perspective.” The SEC sanctioned the partner for his independence violations, and the firm for failing to act on red flags regarding the partner’s relationship with the CFO (AAER 3802, September 19, 2016).
An audit partner had a close personal and romantic relationship with the CAO of an audit client. The SEC sanctioned the audit partner and the CAO for the independence violation as well as the lead engagement partner and the audit firm for failing to act on red flags about the relationship (AAER 3803, September 19, 2016).
An audit firm conducted microcap conferences for several years at which the firm touted a group of companies that included audit clients as high-quality investment opportunities. The PCAOB sanctioned the audit firm and the partner responsible for the firm’s compliance with independence requirements for the client-advocacy-related independence violations, as well as for violation of quality control standards (PCAOB Release 105-2019-022, September 10, 2019).
We realize the SEC’s Reg Flex Agenda is—as its title suggests—flexible. Still, we’ve been anxiously awaiting upcoming open meetings over here given the number of highly-anticipated rulemaking topics teed up for spring 2023 in the latest Reg Flex Agenda. Yesterday the SEC announced an open meeting scheduled for next Wednesday, and one of the items the Commission will consider is share repurchase disclosure.
The SEC’s proposal for issuer repurchases dates back to December 2021. Under the proposed repurchase rules, the SEC would: (i) require daily repurchase disclosure on a new Form SR, which would be furnished to the SEC one business day after execution of a company’s share repurchase order; (ii) amend Item 703 of Regulation S-K to require additional detail regarding the structure of a company’s repurchase program and its share repurchases; and (iii) require information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using Inline XBRL.
As a reminder of the history here, at that same December 2021 meeting, the SEC also proposed amendments to Rule 10b5-1. Subsequently, the SEC reopened the comment period on the share repurchase proposal—twice—and then, in December 2022, adopted the Rule 10b5-1 amendments without acting on the share repurchase proposal. Further, in the final Rule 10b5-1 amendments, the SEC did not address Rule 10b5-1 plans for issuer share repurchase programs and refrained from adopting a cooling-off period for issuers, noting that the need for regulatory action regarding issuer use of Rule 10b5-1 plans, such as in the share repurchase context, was still under consideration.
Cornerstone Research recently released a report, Accounting Class Action Filings and Settlements—2022 Review and Analysis, that reviewed lawsuits related to financial restatements, material weaknesses in ICFR and other accounting issues and concluded that companies are paying a lot more to settle these types of suits. Here’s an excerpt from their press release:
The total value of accounting case settlements grew by more than 67% in 2022 to $1.4 billion, up from $817 million the previous year. Key contributors to the significant jump in total settlement value were an increase in the average settlement amount to $31.7 million in 2022 from $24.7 million in 2021, coupled with a 30% year-over-year increase in the number of settled cases to 43 from 33 the prior year.
Over on Radical Compliance, Matt Kelly’s blog reminds anyone lobbying their CFO for more investment in internal controls not to forget the legal costs in your plea since accounting cases settled in 2022 also took longer to reach settlement:
These numbers add up. Even if your company wins dismissal of the case — are those millions spent on legal fees really going to be less than whatever it costs to configure your ERP software correctly or to automate your key accounting controls? Of course not.
That’s the real argument in favor of investing in strong internal accounting controls, including automation and audit management software and all the rest. Configuring all those systems is a tedious, exacting pain in the neck, but it’s still going to be less expensive than the damage of a half-baked set of internal controls that finally collapses.
